Social Security is a major source of income for retirees, with an average of about 65 million Americans receiving the benefits on a monthly basis as of 2021. But with the program growing larger and larger, there are several myths that can fog up the facts – from age requirements to tax questions, it’s important to know what to expect when you collect your Social Security.
8 Misconceptions About Social Security
We’re separating fact from fiction with our eight common misconceptions about Social Security – let’s dive in.
1. It Probably Won’t Exist Anymore by the Time I Retire
You may have heard that Social Security is running out, or that it won’t be around by the time you actually retire.
There’s some truth to these claims – you see, the funds for Social Security benefits are taken directly from payroll, with both employees paying 6.2% of their income toward the program and employers matching that same number.
Those taxes are collected and accounted for by the Treasury, and then dispersed among all retirees and those collecting disability benefits. The problem? The number of retirees is actually increasing faster than the Social Security program can keep up.
The Social Security Administration projects that benefits will still be paid in full up to the year 2037. Here’s where the myth part comes into play: that doesn’t mean Social Security will end in 2038. Rather, if everything stays on the current track, beneficiaries can expect to collect 76% of their scheduled benefits rather than the full amount. It’s not the best-case scenario, but also not the worst.
Plus, the hope is that the program will enact some changes before then. For example, if the payroll tax rate is increased by just 2%, the program would garner enough funds to last another 75 years.
With all this in mind, it’s probable that Social Security will still be around in some form or other by the time you hit retirement age.
2. Social Security Will be Enough to Fund My Retirement
This one doesn’t really have a cut-and-dry answer, because your expenses largely depend on your lifestyle. But for most of our clients, Social Security benefits alone are not enough to fund their entire retirement needs – you’ll need to develop additional sources of income for your later years.
It’s also important to keep in mind that if your spouse were to pass away, you’d no longer receive both of your benefits. Rather, you would continue to receive whichever amount was higher.
3. It Doesn’t Matter When I Claim My Benefits
Your monthly benefit amount is actually tied to when you apply to begin receiving Social Security – so it definitely matters when you claim.
The earliest an individual can claim benefits is at age 62, and the latest is currently age 70. Claiming at an earlier age will permanently reduce your monthly benefit amount, whereas claiming at closer to 70 years of age will permanently increase your benefits. The exact amount you’ll receive also depends on when you were born, your current age, and your work record.
4. I Have to Stop Working Once I Start Taking Social Security
Many of our clients are under the impression that they need to stop working once they collect Social Security – that’s not true!
You just need to be aware that if you’re under your full retirement age (which varies), and you have a higher income, your benefits may end up being taxed at 85% of the benefit. In most cases, you’ll want to make sure your income is below that threshold until you reach your full retirement age.
5. Income from Social Security Doesn’t Get Taxed
As stated above, there actually are certain instances in which your Social Security income will be taxed. As of 2022, an individual with a gross income above $25,000 can expect their Social Security income to be taxed at a rate of 50%. For jointly-filing couples, that number jumps to $32,000.
Individuals with $34,000 or more per year will see up to 85% of their Social Security benefits taxed, while couples filing jointly hit that threshold at just $44,000.
Whatever your level of income, you should keep in mind that there’s currently no case where all of your Social Security income would be subject to taxation.
6. Social Security and Medicare are the Same Thing
While Social Security benefits and Medicare might go into effect for you around the same time, they’re actually different programs.
Social Security is an income program that only pays retirement, disability, and family/survivors benefits.
In contrast, Medicare is a health insurance program intended for those aged 65 and older, or those who have received disability benefits for more than two years.
7. My Divorce Will Lower My Benefit Amount
We always recommend that clients going through a divorce should find out what their spouse’s full retirement age and amount is. This can help later on when you’re trying to apply for your benefits, and prevent you from having to reach out to your ex for an uncomfortable conversation down the road.
Beyond that, there are some key requirements you have to meet before you can claim your ex-spouse’s Social Security benefits:
- You must have been married for at least 10 years
- You cannot have remarried since then, unless you are over the age of 60.
- You must be at least 62 years old
Depending on when you file to claim benefits and other factors, you may be eligible to claim up to 50% of your ex-spouse’s Social Security income. It’s also important to note that the amount you receive in this instance would not have an effect on the amount your ex-spouse would receive in their own retirement.
8. I Can’t Stop Receiving Social Security Once I Start
Sometimes life throws curveballs and changes our directions – that’s okay! In fact, the Social Security Administration actually allows individuals to withdraw their applications for retirement benefits up to 12 months after you’ve been approved.
Each person is allowed only one withdrawal, but are then able to reapply again at a later date.
There are also certain other instances where you can request to suspend your Social Security income payments, assuming you’re still under the age of 70.
Learn More with Clarity
Have more questions about your Social Security benefits? Connect with an advisor at Clarity Wealth Development today – we’d be happy to help!