On its face, Social Security seems like a simple program. Workers pay Social Security taxes into the system that go to pay current retiree and disability benefits, with the expectation that, when they retire, they'll get Social Security benefits funded by taxes paid by younger workers.
Yet because the details of how Social Security works are so complex, a huge amount of misinformation and confusion has arisen about the program. As a result, many Americans fall into the trap of believing Social Security myths rather than digging deeper to find the truth. Let's look at three popular Social Security myths that can lead you to make major mistakes in your retirement planning.
Myth 1: There's a perfect time to start collecting Social Security
Look around the Internet, and you'll find all sorts of conflicting advice about when you should start taking your Social Security benefits. Many analysts correctly note that the longer you delay starting to get Social Security checks, the bigger those checks will be when you collect them. Given that Social Security is, for many people, the one reliable income source that will last the rest of their lives, making the most of those benefits makes a lot of sense.
Yet other analysts also correctly note that the earlier you start receiving Social Security, the larger a head start you'll have over those who wait for years before they get a single penny in benefits. It can take a decade or longer for the larger delayed payments to catch up with the smaller payments you get by taking Social Security early at age 62.
As nice as it would be if there were a simple and perfect answer for everyone, the fact is that everyone's situation is different. Factors like your family situation, your health, and your earnings can make the same decision smart for one person and unwise for another. Once you understand the trade-offs and rewards of making various decisions about when to start receiving Social Security benefits, you'll be better able to make an informed decision that's right for you.
Myth 2: Social Security will run out of money, so you should grab everything you can now
The majority of Social Security recipients start taking benefits earlier than full retirement age, and one commonly cited reason is that the Social Security Administration has warned Americans about the potential for the program to run out of money. According to its analysis, the Trustees in charge of the Social Security Trust Fund anticipate that the fund will run out of reserves in 2033. That has many retirees clamoring to get as much as they can from the program while the getting's good.
The myth here is the idea that Social Security will stop making payments entirely in 2033. Even in a worst-case scenario, the SSA believes that it will be able to keep paying about 77% of all benefits due after that date, using Social Security tax revenue to fund payments. Moreover, in similar situations in the past, lawmakers have managed to make Social Security reforms that extended the anticipated lifetime of the program. As with the first myth, that doesn't mean that claiming early is a bad choice -- but don't do it for the wrong reason.
Myth 3: Decisions about Social Security have nothing to do with other financial considerations
Like it or not, Social Security is deeply entwined with other decisions you make about your retirement planning. If you expect to work into your late 60s but want to supplement your income with Social Security benefits, then you have to consider the potential impact of having so much earned income that you start to forfeit your benefits. Similarly, when it comes to taxes, your decisions regarding withdrawals from tax-favored retirement accounts like IRAs and 401(k) plans can affect how much of your Social Security benefits will be subject to tax.
Moreover, married couples need to consider the impact each spouse's Social Security decision has on the other spouse's benefits. In some cases, what looks best to you can make your spouse -- and your family as a whole -- worse off.
As the Baby Boom generation ages, there's more information on Social Security than ever before. But you still have to beware of Social Security myths that can lead you astray. Keep some of the most common misunderstandings in mind, and you'll give yourself a much better chance of making the right choices for you and your family.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.