Social Security benefits can go a long way in retirement, and millions of seniors depend on their monthly checks for at least a portion of their income.
In fact, nearly 1 in 4 workers say their benefits will be their primary source of income in retirement, according to a 2022 report from the Transamerica Center for Retirement Studies. That means it's more important than ever to ensure you're maximizing your monthly payments.
However, there are a few reasons you may not receive as much as you're expecting. By understanding how these factors will affect your benefits, you can avoid being caught by surprise in retirement.
1. State and federal taxes
Even in retirement, your benefits may still be subject to income taxes. State taxes will depend on where you live, and fortunately, 38 states don't tax Social Security. But if you live in a less tax-friendly state, be prepared to pay income taxes on your monthly checks.
Regardless of where you live, your benefits could also be subject to federal taxes. How much you'll owe will depend on a figure called your "provisional income," which is half your annual benefit amount, your adjusted gross income, plus any nontaxable interest.
So, for example, if you're receiving $20,000 per year from Social Security and withdrawing $30,000 per year from your 401(k), your provisional income would be $40,000 per year.
If your provisional income is higher than $25,000 per year (or $32,000 per year for married couples filing taxes jointly), you'll owe federal taxes on up to 85% of your benefit amount. While you may not be able to avoid taxes on Social Security, having at least a general idea of how much you'll owe can make it easier to prepare for them.
2. Claiming too early
The age you begin claiming Social Security will directly affect how much you receive each month, and the earlier you file, the smaller your monthly payments will be. If you file as early as possible at age 62, your benefits will be reduced by up to 30%.
Claiming early isn't always a bad idea, and there are some situations where it could be a smart move. But if you file early without realizing it will result in smaller checks each month, it could potentially spell trouble for your retirement.
3. Not knowing your correct full retirement age
Your full retirement age (FRA) is the age at which you'll receive the full benefit amount you're entitled to based on your earnings history. Your exact FRA will depend on the year you were born, but everyone's will fall between ages 66 and 67.
If you don't know your FRA off the top of your head, you're not alone. Only 13% of adults can correctly name their FRA, according to a 2022 survey from the Nationwide Retirement Institute, and the average guess among baby boomers is 63 years old.
When you aren't sure of your FRA, it could affect your decision about when to file for benefits. If, for example, you believe your FRA is 63, you may begin claiming at that age thinking you'll receive your full benefit amount. In reality, though, you're filing at least three years early, which will result in smaller payments each month.
Social Security can be complex and confusing at times, but it pays to understand as much as possible about how your benefits are calculated. When you're aware of how these factors will impact your payments, it will be easier to maximize your monthly checks.