Don't Let These 3 Social Security Surprises Ruin Your Retirement

Some surprises can be fun, like an unexpected birthday gift or a bonus from your work. But of course, there are nasty surprises, too, some of which that could end up costing you valuable dollars.

Here's a look at three potential Social Security issues that you should know about, so that one or more of them don't end up catching you off-guard in retirement.

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1. Taxation of benefits

First off, you might be surprised to learn that Social Security benefits can be taxed at the federal level depending on your income. Specifically, up to 85% of your benefits. Your benefit tax rate depends on your combined income, which is your adjusted gross income (AGI), plus non-taxable interest, plus half of your Social Security benefits. The following table has the details:

Data source: Social Security Administration. 

Note that this doesn't mean that you would face a tax rate of 50% or 85% on your benefits -- just that that portion of your benefits would count as taxable income.

Some states also tax Social Security benefits, though most do not. Even among those that do, there's a good chance that your benefits won't end up taxed, depending on your income and other factors.

2. Benefits not keeping up with inflation

Another surprise for many retirees is that their Social Security benefits haven't kept up with inflation, despite cost-of-living adjustments (COLAs) in most years. But depending on your particular spending habits, there's a good chance that the increases will be insufficient.

To measure inflation, Social Security uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), and its name gives away part of the problem: It's meant to reflect spending habits of workers, not retirees. Retiree spending is generally different. For example, retirees tend to spend a lot more than younger folks on healthcare, which is a major expense that continues to rise in cost at a significant rate. According to a report from the Senior Citizens League , Social Security benefits have lost about 30% of their purchasing power between 2000 and 2020.

3. Shrunken benefits if you earn too much

Finally, one of the worst Social Security surprises is receiving smaller checks than expected -- as a result of working and earning more. In 2021, for every $2 above $18,960 you earn in income, your annual Social Security benefits will be reduced by $1 -- if you haven't yet reached your full retirement age (which is 66 or 67 for most of us). In the year you reach your full retirement age, for every $3 you earn above $50,520 for the period before you hit that threshold age, your total benefits for the year will shrink by $1.

Once you reach full retirement age, you can work and have no reductions in your checks. While the numbers may seem scary, try not to worry too much about the reductions, as withheld sums will be factored back into checks you'll receive later in life, increasing them. In short, the money is withheld, not forfeited forever.

The more you learn about Social Security (and other personal finance issues), the more likely it will be that you'll make smart financial decisions, saving yourself money -- or helping you collect more money. Staying ahead of potential Social Security surprises can give you better chances for future financial success and a smooth-sailing retirement.