Unless you’re really planning to save a heaping pile of money for retirement, you may end up relying on Social Security quite heavily to pay your bills as a senior. And if that’s the case, the more you read up on the program, the easier it’ll be to make the most of it.
But there’s a lot of misinformation out there surrounding Social Security, and buying into it could cause you a world of financial upheaval. Here are a few dangerous Social Security myths with the potential to wreck your retirement.
1. If you reduce your benefits by filing at 62, they’ll increase at full retirement age
You’re allowed to file for Social Security as early as age 62, but you won’t be entitled to your full monthly benefit based on your personal earnings history until you reach full retirement age, or FRA, which is 66, 67, or 66 and a specific number of months; you can consult this table to see what yours looks like:
Year of Birth
Full Retirement Age
66 and 2 months
66 and 4 months
66 and 6 months
66 and 8 months
66 and 10 months
1960 or later
If you file for benefits at age 62, they’ll be reduced by 25% to 30%, depending on your precise FRA. Now, you may have been led to believe that once you reach FRA, your full monthly benefit will be reinstated, but that’s just not true. Once you claim your benefits, your monthly payment will stay the same for life, not counting the cost-of-living adjustments you get from year to year, which are designed to help benefits keep up with inflation.
However, there is one exception to this rule. If you file for benefits early and regret your decision soon after, you get one opportunity in your lifetime to withdraw your application, repay all of the money you received from Social Security, and file again at a later age, thereby avoiding a situation in which you are stuck with a reduced benefit for life. But you’ll need to complete that do-over within a year of taking benefits, and if you’ve already spent the money you received from Social Security, that may not be possible. As such, it’s important to understand the consequences of filing for benefits early — and make sure it’s really the right choice for you.
2. It pays to delay Social Security indefinitely to grow your benefits
Just as you’re allowed to claim Social Security before FRA, you can also delay your filing past FRA and boost your benefits by 8% a year in the process. That increase will then remain in effect permanently.
Now, you might think, “Great, I’ll delay benefits until my mid-70s to score a higher monthly payout.” But actually, you can only get credit for delaying your filing until 70. After that, there’s no financial incentive to hold off on signing up, and if you wait any longer, you’ll actually risk losing out on money you were otherwise entitled to.
3. Your Social Security benefits will be yours to enjoy tax-free
Many people assume that the money they collect from Social Security won’t be subject to taxes. But while that’s true for some seniors, it’s not the case for others.
Whether your benefits are subject to taxes will hinge on your provisional income, which is calculated by taking your non-Social Security income and adding in half of your annual benefit. If your total falls between $25,000 and $34,000 and you’re single, you could be taxed 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 with a provisional income of $32,000 to $44,000, you’ll risk taxes on up to 50% of your benefits, and beyond $44,000, you could be taxed on up to 85% of your benefits.
There are also some states that tax Social Security benefits themselves, so in addition to federal taxes, you may lose a chunk of that income to your home state. Be sure to account for these taxes so your retirement finances aren’t thrown off-course.
Social Security is a complex program, so the more you learn about it, the better. That way, you’ll be less likely to buy into these and other myths that could really leave you in a bad financial spot once your career comes to an end.
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