Most seniors get income from two primary sources: Social Security and retirement savings. As a result, to estimate how much money your investments must produce, you should have an accurate idea of how much Social Security benefits provide.
Unfortunately, a recent Nationwide survey revealed the majority of workers don’t know two crucial facts necessary to estimate the funding that comes from Social Security. And this could be a huge problem, since setting retirement goals will be impossible without this knowledge.
Here are the two important facts the majority of Americans are unclear about.
1. How much income Social Security is expected to produce
According to Nationwide’s data, around 54% of all adults have no idea how much income Social Security is expected to produce relative to what they were earning on the job.
Since there are around 258.3 million adults in the U.S. that means close to 140 million people may be lacking the most basic knowledge about their retirement benefits.
The sad reality is, many people who are unaware of what level of income Social Security will provide are going to end up disappointed. That’s because these benefits are meant to replace only around 40% of what you were earning before leaving the workforce. They’re supposed to work in conjunction with savings and pension benefits, although pensions are no longer common among private-sector workers.
If you’re among the millions in the dark about this key issue, you’re at risk of not setting realistic savings goals. It’s crucial to understand that Social Security is meant to replace about half of the total income you’ll need in your later years — at most.
It’s up to you to build a nest egg that will give you the rest of the money required to avoid a major decline in quality of life. That means ensuring you have enough invested to replace at least another 40% of pre-retirement earnings, and ideally even a little more than that.
2. If or when benefits are taxable
Americans are also confused about what their tax obligations will be in retirement. An estimated 55% of adults either believe Social Security isn’t taxable, or can’t answer whether it is or not, according to the Nationwide survey. That’s just over 142 million people.
Unfortunately, if you’re expecting to keep all of your benefits and the IRS and your state government take part of them, you could face a big shortfall. And because of the way the rules are set up at the federal level, a growing number of seniors will face this exact issue.
See, benefits become partly taxable once provisional income exceeds $25,000 for single filers or $32,000 for married filers. Provisional income is half of Social Security benefits, some non-taxable income, and all taxable income.
And these thresholds aren’t indexed to inflation, which means they don’t adjust each year and more seniors exceed them because wage growth naturally pushes earnings higher. And this is just federal taxes — there are also 13 states that tax part of your benefits.
It’s important to understand exactly what Social Security is designed to do for you, as far as providing income, and to know whether you’ll get to keep all the money coming in or not. So make sure you understand these two key rules even if many of your peers don’t.
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