Millions of Americans rely on Social Security earnings in retirement for financial support. If your golden years are far off in the distance, you might not give a second thought to Social Security and what the program means for you.
But that can be a mistake. If you don't understand Social Security now, you could be in for some unfortunate surprises after you stop working.
For starters, the program might not be as healthy as you think. "Many estimates have the Social Security Trust Fund exhausting around 2034,” said Peter Donohoe, a Boston-based financial consultant at Citizens Investment Services.
While experts are hopeful politicians eventually will act to shore up the system, there are no guarantees. So, to be safe, it's wise to make some smart money moves now that could put you in a better financial position when you retire.
Discover 10 things everyone gets wrong about Social Security — and the truths you need to know to prepare for retirement.
Myth No. 1: Your Benefit Is the Same Regardless of When You Retire
If you're 60 or older, three months before your birthday, the Social Security Administration will send you a recap of your annual earnings history. If you review this statement closely, you will see that the breakdown of benefits is based on your earnings to date. The statement gives you an estimate of benefits you will earn if you continue working until you reach a certain age.
Many people mistakenly assume their monthly Social Security retirement benefits will be the same no matter what age they retire. Retiring from work and claiming Social Security at a younger age can hurt you, though.
Look closely at your statement, and you will see that you can get a bigger benefit by delaying retirement and claiming benefits after your full retirement age. The difference can be as much as a few hundred dollars more per month if you wait than if you retire at 62.
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Myth No. 2: You Can Wait Until Retiring Before Thinking About Social Security
Long before you retire, try to learn about the Social Security benefits for which you are eligible. Too many people overlook this step.
Learning more about Social Security benefits can help you make more effective financial planning decisions, and help you maximize your social security income. For example, you might be eligible for your ex-spouse's benefits, yet not even know it. You can also earn a bigger Social Security check simply by delaying retirement beyond your full retirement age.
You can find a wealth of information about retirement planning on the "Retirement Planner" page of the Social Security Administration website.
Myth No. 3: You Automatically Get Full Benefits Upon Reaching Age 65
Don't automatically assume you will receive benefits as soon as you reach 65. Social Security rules have changed over the years. “The reality is that full retirement age was age 65, but is now based on your year of birth and may currently be up to age 67,” Donohoe said.
You still have the option of taking your benefits as early as age 62, but you will receive a reduced benefit — about a 30 percent reduction — if you do. If you receive a spouse’s benefit beginning at age 62, your benefit is reduced to about 32.5 percent of the amount your spouse would receive if he or she started getting benefits at full retirement age.
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It is a myth that taking your benefit early always pays the highest lifetime benefit, Donohoe said. The reality is that many factors — including future cost-of-living adjustments and your eventual age of death — influence "which claiming date maximizes lifetime benefit," he said.
Myth No. 4: You Can Keep Working While Claiming Full Social Security Benefits
A big percentage of Americans misunderstand the rules for working when collecting Social Security benefits.
More than half of people in a MassMutual survey wrongly thought they could continue working at any age while also collecting full Social Security retirement benefits.
While you are free to work and receive Social Security retirement benefits, the government will reduce your benefit if you are younger than your full retirement age and end up making more than the yearly earnings limit. In 2017, that earning limit is $16,920. The Social Security Administration deducts $1 in benefits for every $2 you earn above that limit until you reach retirement age.
Things change a little as you get closer to full retirement age. In the year you reach your full retirement age, the Social Security Administration deducts $1 for every $3 you earn above the annual limit. In 2017, this limit is $44,880. And once you are past your retirement age, you can keep working without any deductions on benefits — and there are no limits on your earnings.
Myth No. 5: You Cannot Collect an Ex-Spouse’s Social Security Benefits
If you end up getting divorced during your lifetime, you are eligible to receive Social Security retirement benefits based on your ex-spouse’s earnings history, said David Freitag, a financial planning consultant with MassMutual.
The Social Security Administration lists the conditions of eligibility for these benefits. Among other factors, they include having been in a marriage that lasted at least 10 years to an ex-spouse who is unmarried, and age 62 years or older.
If you start receiving benefits at your full retirement age, your benefit is equal to half of your ex-spouse’s full retirement amount or disability benefit, according to the Social Security Administration. But, if you end up remarrying, you cannot collect benefits unless your next marriage ends by death, divorce or annulment.
Myth No. 6: A Spouse Can’t Receive Your Social Security Benefits
Even if your spouse has no earnings history or doesn’t meet the 40-credit requirement to receive benefits, he or she is eligible for Social Security retirement benefits simply because of your marriage, Freitag said.
To receive this spousal benefit, your spouse must be at least 62 years of age or have a qualifying child in his or her care. The total benefit might be as much as half of the primary worker's insurance amount. The Social Security website can help you calculate this value. Spousal benefit rules can change, so it's important to know what the benefit currently provides.
Myth No. 7: You Are Likely to Be Disqualified for Social Security Benefits
Don't worry about getting to retirement only to end up disqualified for benefits. “It is more likely to accidentally ‘miss out’ on full benefits than it is to be disqualified for Social Security,” Donohoe said.
You can, however, miss out on benefits if you get a part-time job before full retirement age and no longer pass the earnings test, Donohoe said. You might also miss out on benefits if you are eligible for a large widow or widower benefit when your spouse dies, but you then get remarried before you turn 60. If you are divorced and get remarried, you will miss out on a spousal benefit.
“Proper planning around life events and claiming is vitally important when claiming Social Security,” Donohoe said.
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Myth No. 8: Social Security Will End in 2034
First, the bad news: According to the Trustees of the Social Security and Medicare trust funds, current projections have the Social Security trust fund running out of money in 2034. The prognosis is not as dire as that projection would seem to indicate, however.
The Social Security trust fund is a surplus account; while that excess money will be depleted by 2034, the Social Security program will still be funded with payroll taxes on working Americans. The Social Security Trustees currently project that future payroll taxes will still fund 77 percent of scheduled benefits in 2034. Even by 2091, the projection is that regular payroll taxes will be sufficient to fund 73 percent of scheduled benefits.
While receiving 77 percent of your expected benefits is not exactly good news, it’s a far cry from receiving nothing at all when 2034 rolls around.
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Myth No. 9: You Don’t Have to Pay Taxes on Social Security
While it's true that some people don't have to pay taxes on their Social Security income, benefits are taxable if you have, in the words of the Social Security Administration, "other substantial income." The amount you have to pay is based on your filing status and the amount of your taxable income, which includes wages, self-employment income, interest, dividends and other taxable income. There are strategies to follow to keep your taxable income lower in retirement. Here's the specific breakdown:
For those filing as an individual:
- If your income is between $25,000 and $34,000, up to 50 percent of your Social Security benefits may be taxable
- If your income is more than $34,000, up to 85 percent of your Social Security benefits may be taxable
For those filing jointly:
- If your combined income with your spouse is between $32,000 and $44,000, up to 50 percent of your benefits may be taxable
- If your combined income is more than $44,000, up to 85 percent of your benefits may be taxable
If you are married and file separately, your benefits will likely be taxable.
Myth No. 10: What You Pay in Is What You Get Out
When you pay into the Social Security fund, you aren't depositing your money into a governmental savings account. Your funds are actually distributed to current beneficiaries of the system. The amount you get out of Social Security will not equal the amount you put in. Your payments are based on a combination of your earnings history and the age at which you claim benefits.
For 2017, the maximum Social Security benefit for workers retiring at the full retirement age of 66 is $2,687 per month. The average monthly payout for retired workers, as of August 2017, is just $1,371.14, however.
To check how much you've already paid into Social Security, sign up for a free account with the Social Security Administration. Once you've set up your account, you can see the estimated Social Security and Medicare taxes you've paid, along with estimates of your future Social Security benefits.
John Csiszar contributed reporting to this article.