3 Social Security Facts That Might Surprise You

Social Security is both very important and very popular, but many people don’t have a very good understanding about exactly how it works. In fact, many people don’t know some basic things that could affect the size of their checks and the role these benefits will play in their retirement.

Here are three key facts about Social Security that could come as a big surprise.

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1. Full retirement age is no longer 65

Sixty-five has long been viewed as a default retirement age by many Americans. That’s likely because when Social Security was created, 65 was considered full retirement age (FRA), or the age at which retirees could file for benefits and receive their primary insurance amount — the standard benefit based on their average wages over their career.

Unfortunately, 65 hasn’t been the full retirement age for a long time. Congress changed the rules in 1983. Now, for anyone born after 1943, full retirement age has been 66 or later. FRA is slowly ticking up over time, and for people born in or after 1960, it will be as late as 67.

If you anticipate your FRA being earlier than it is, this could be a big problem because if you claim benefits before FRA, monthly checks are reduced due to early filing penalties. If you were planning to start your checks at 65 but your FRA is 67, your benefits are going to be much smaller than planned, unless you wait an extra two years.

2. Some of your benefits could be taxable

Many Americans are also unaware their retirement benefits could be subject to federal and possibly state tax.

It might seem odd to have earned retirement benefits counted as taxable income. After all, you already paid taxes to qualify for this monthly retirement check. But around 50% of seniors currently lose some of their Social Security to the IRS, and more of them will in the future because the thresholds at which benefits become taxable aren’t indexed to inflation.

If your provisional income is below $25,000 as a single tax filer or $32,000 as a married joint filer, you don’t have to worry about your Social Security benefits being taxed by the IRS. Provisional income is the total of half your Social Security benefits, all taxable income, and some non-taxable income.

Once your income exceeds this amount, the IRS will take a cut. In fact, up to 85% of your Social Security could be taxed depending how high your income is. And if you live in one of the 13 states that also tax benefits, you could face an even bigger tax bill.

Planning for taxes is crucial so you can make informed decisions during your working life, such as exploring the possibility of using Roth retirement accounts instead of traditional ones. That can help you avoid Social Security taxes because Roth distributions aren’t part of provisional income.

If you are nearing retirement, you also need a realistic assessment of after-tax Social Security income and to plan for paying your taxes.

3. Your benefits are only meant to provide a portion of your retirement income

Lastly, far too many people anticipate Social Security will be sufficient to fund retirement when in reality it’s not designed to do that and can’t be your sole income source.

Social Security is supposed to be one of the legs on a three-legged stool that provides retirement support, with seniors also getting a pension and money from savings. Since it’s supposed to work in conjunction with these other income sources, it’s only designed to replace 40% of pre-retirement income.

While most seniors do spend less after leaving the workforce, most realistic projections suggest they’ll still need about 80% to 90% of prior earnings. Getting just 40% of the amount you’re used to living on could necessitate drastic and unwelcome lifestyle changes.

You don’t want to be too reliant on Social Security, or anticipate your benefits will provide more income than they do because you get your FRA wrong or don’t realize the impact of taxes. So make sure you take these three key Social Security facts into account when making your retirement plans.

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