Social Security is a big source of retirement income for most Americans, so understanding how the program works is essential retirement planning knowledge.
Unfortunately, most near-retirees have some misbeliefs about Social Security, and their knowledge of the program is actually getting worse, according to a questionnaire commissioned by Mass Mutual, the life insurance company. Of the 1,500 Americans between 55 and 65 who were tested, 50% answered five or more questions incorrectly out of a 13-question quiz. (That's up from 47% last year.)
While most people know that they'll reduce their benefits by filing before their full retirement age in most cases, there were some questions that more than half of the test-takers got wrong. Below are the biggest false beliefs near-retirees have about Social Security.
Image source: Getty Images.
False belief No. 1: Delaying past 70
Just over half of respondents -- 51% -- marked "True" for the following statement: "If I delay taking Social Security benefits past the age of 70, I will continue to get delayed retirement credit increases each year I wait."
In fact, delaying beyond 70 years old provides no benefits. While you can wait to claim beyond age 70, there aren't usually any benefits to waiting. You certainly won't receive a bigger monthly check.
For most retirees, 70 is the optimal age to claim in order to maximize their lifetime benefit. Social Security was originally designed to pay out about the same amount regardless of what age you decide to apply for retirement benefits. However, increasing life expectancies now make it a safe bet for most people to wait as long as possible to claim Social Security. That remains true even after increasing the full retirement age.
But you rarely, if ever, should consider delaying past age 70.
False belief No. 2: Social Security taxes
Nearly two-thirds of respondents -- 62% -- marked "True" for the following statement: "Social Security retirement benefits are subject to income tax just like withdrawals from a traditional IRA account."
Unfortunately, Social Security taxes are far more complicated than those on withdrawals from a retirement account.
Social Security taxes are based on a metric called "combined income." Combined income is the sum of your adjusted gross income, untaxed interest income, and half your Social Security benefits. If your combined income exceeds a certain threshold, a portion of your Social Security benefits becomes subject to income tax.
The following table shows the thresholds.
| Taxable Amount | Combined Income Range (Single) | Combined Income Range (Joint) |
|---|---|---|
| 0% | <$25,000 | <$32,000 |
| Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
| Up to 85% | >$34,000 | >$44,000 |
Data source: Social Security Administration
Additionally, state taxes will differ depending on where you live. Most states don't tax Social Security benefits at all, but 12 states may tax a portion of your Social Security benefits in some circumstances.
A lot of strategy goes into minimizing taxes in retirement, and the way the government taxes Social Security benefits is a big part of planning. If you're interested in minimizing the effect of Social Security on your taxes, you might want to consult a professional.
False belief No. 3: Citizenship requirements
A startling 71% of respondents marked "True" for the following statement: "I must be a U.S. citizen to collect Social Security retirement benefits."
There are several paths a non-citizen could take to receive Social Security retirement benefits. The most straightforward is if they arrive with a green card. They'll need to apply for a Social Security number before they can start working and receiving wages in the United States.
Then Social Security benefits accrue just like they do for U.S. citizens. Even if a non-citizen came to the U.S. with a work visa and then returned to their home country, they may be eligible for benefits.
Image source: Getty Images.
Non-citizens may also qualify through spousal or survivor benefits even if they never worked in the United States. They can qualify if they're a citizen or resident of a country with which the U.S. has a Social Security agreement, and lived in the U.S. with their American spouse for at least five years. Alternatively, they qualify for survivor benefits if they were married to someone who died during U.S. military service.
Even some undocumented immigrants will be able to qualify for Social Security benefits in the future, thanks to DACA. This law allows undocumented immigrants who were brought to the U.S. as children to receive work authorization and a Social Security number and work legally in the United States.
If you're a non-citizen and you've been under the impression that you won't be eligible for Social Security, you should find out if you qualify under any of the above circumstances. It could make a world of difference in your retirement plans.
Make sure you know the facts
It pays to know as much as you can about Social Security. How your benefit is calculated, how it's taxed, and who's eligible are just some of the basics. If you're going to make a plan for retirement, make sure you have all the pertinent facts straight beforehand.
