Millions of seniors today collect monthly benefits from Social Security. And for many, that income is essential to their ability to cover their basic expenses.
You may be looking forward to the day when you’re able to start collecting Social Security. But before you get too excited about that, do be aware of the following shortcomings.
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1. Your benefits won’t come close to replacing your income in full
You might assume that Social Security will manage to replace all of your pre-retirement income or at least get close. But actually, if you’re an average earner, you can expect your benefits to replace about 40% of your pre-retirement income only.
For context, it’s common for seniors to require around 70% to 80% of their former paychecks to manage well in retirement. Of course, there are exceptions to this rule, and some retirees actively make the choice to live frugally.
But for the most part, retiring on just 40% of your former income isn’t a great idea. So it’s important to have some additional income at your disposal, whether it’s withdrawals from a savings plan or earnings from a part-time job.
2. Benefit cuts might happen relatively soon
Don’t get too comfortable with the 40% figure above. Social Security is expected to deplete its trust funds come 2034. Once that happens, the program may have to cut benefits in the ballpark of 20% due to a lack of funding.
Granted, benefit cuts aren’t set in stone, and it’s possible that lawmakers will, in fact, manage to find a way to prevent them. But they’re also something you’ll need to brace for. And the best way to avoid getting hurt by Social Security cuts is to boost your savings so you’re less reliant on those benefits down the line.
3. Benefits can be taxable
There are some states that impose their own taxes on Social Security income. But at the federal level, your benefits may be subject to taxes no matter what state you reside in, depending on your provisional income.
Provisional income is calculated by taking half of your annual Social Security income plus your non-Social Security income, including tax-free interest you may be collecting from investments like municipal bonds. If your provisional income falls between $25,000 to $34,000 and you’re a single tax-filer, you’ll face taxes on up to 50% of your Social Security benefits. Beyond $34,000, you could be taxed on up to 85% of your benefits.
If you’re part of a married couple filing taxes jointly, a provisional income between $32,000 and $44,000 could mean facing taxes on up to 50% of your Social Security benefits. And beyond $44,000, you face taxes on up to 85% of those benefits. Ouch.
While Social Security serves as a financial lifeline for many seniors, the program is far from perfect. Make sure you’re aware of these key points so you don’t end up struggling financially once your career comes to a close. And better yet, do your best to build a nice nest egg so you have income to fall back on outside of the benefits you’re in line to receive.
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