Many people can't wait until the time comes to start collecting Social Security. After all, you worked hard all your life and paid taxes into the program, so you deserve to enjoy a steady stream of monthly income later in life.
While you might appreciate collecting a Social Security benefit each month, you might also encounter certain pitfalls related to Social Security. Here are a few to prepare for.
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1. Insufficient raises
Social Security benefits are eligible for an annual raise known as a cost-of-living adjustment, or COLA, which are based on the rate of inflation during the previous-year's third quarter. In 2023, for example, seniors on Social Security are seeing their benefits rise by 8.7%. That's due to soaring inflation during the third quarter of 2022.
The problem, though, is that historically, Social Security COLAs have failed to keep pace with inflation. It's looking like 2023 might be an exception, mostly since this-year's COLA is really huge and inflation levels have started to dip since that COLA was approved in October of 2022.
For the most part, COLAs do a poor job of helping seniors gain or maintain buying power from one year to the next. If you rely too heavily on Social Security when you're a retiree, you might struggle financially.
2. Slashed benefits
Social Security is facing a revenue shortfall that could lead to benefit cuts. In fact, the program's Trustees recently projected that the Social Security trust funds could be out of money as early as 2035. Once that happens, seniors collecting benefits could see their monthly payments slashed by more than 20%.
This is yet another reason not to depend too heavily on Social Security. It's hard to say with certainty that lawmakers will let benefit cuts happen, but it's a distinct possibility, given that no one has come up with a viable solution to pump more revenue into the program.
3. Taxes on benefits
Social Security income isn't always taxable. But if your provisional income is moderate, you'll face taxes on a portion of those benefits -- and possibly a large amount.
Provisional income is calculated by taking your modified adjusted gross income and adding in half of your annual Social Security benefit. If that total falls between $25,000 and $34,000 and you're a single tax filer, you'll face taxes on up to 50% of your benefits. Beyond $34,000, you could be looking at taxes on up to 85% of your benefits.
If you're married filing jointly, taxes on benefits could come into play with a provisional income of $32,000 to $44,000. And beyond $44,000, you should brace for taxes on up to 85% of your benefits. These taxes are important to plan for so your retirement finances aren't thrown for a loop.
While there are a lot of great things to say about Social Security, you might run into your share of hiccups once you become dependent on those benefits. Be mindful of these points to avoid needless financial stress during retirement.
