Social Security is one of the most important income sources available to retirees. Yet there’s so much about Social Security people tend to get wrong. Let’s review four of the most common Social Security misconceptions so these myths don’t trip you up.
“Social Security will replace my paycheck fully”
Wouldn’t it be nice if you could count on Social Security to pay you the equivalent each month of what you earned while you were working? If that were the case, you wouldn’t have to worry as much about saving for retirement, and you’d certainly be able to go into retirement with more confidence. But alas, Social Security will only replace about 40% of your pre-retirement wages if you earn an average salary. What this means is that if you’re a higher earner, Social Security may replace an even smaller percentage of your income. Ouch.
Why is this important? Knowing how much income Social Security will take the place of helps you know how much to save for retirement on your own. Â Say you’re hoping to replace 90% of your income in retirement and you earn an average wage. You can set a savings goal to build a nest egg large enough to replace 50% of your income each year, with Social Security covering the remaining 40%.
“Social Security is going broke”
You’ve probably heard warnings that Social Security is running out of money or on the verge of bankruptcy. And the good news is that none of that is happening. Social Security is facing a financial shortfall in the coming years that could result in benefit cuts. But lawmakers still have time to prevent those cuts from happening.
And do remember that Social Security has never resorted to cutting benefits in its roughly 90-year history. There’s no reason to think the worst now, especially since there are options for avoiding benefit cuts, like making changes to the program’s full retirement age or increasing taxes to fund the program.
Granted, nobody wants to see their taxes go up. But this is one of those “rock and hard place” situations. And to prevent cuts, something may have to give.
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“Claiming Social Security as late as possible is my best bet”
You can claim Social Security at any point once you turn 62. At full retirement age, which is 67 for anyone born in 1960 or later, you can collect your monthly benefits without a reduction. And if you delay your claim past full retirement age, your benefits grow 8% a year until age 70, which is typically considered the latest age to sign up.
You might assume that filing for Social Security as late as possible is your best option, since it leads to the largest monthly checks. But it may not lead to more lifetime income. When you delay your claim, you’re giving up immediate payments for the promise of getting more money each month. If you don’t live long enough to make up for those missed payments, you could end up losing out on total Social Security income by delaying your claim.
The tricky thing, of course, is that no one knows how long they’ll live. But if you want to hedge your bets on lifetime Social Security income, you may want to file at or around full retirement age rather than wait.
“If I claim Social Security, I’ll have to stop working”
A lot of people claim Social Security because they stop working and therefore need the money. But you absolutely do not have to write off the idea of holding down a job just because you’re gearing up to take benefits. Once you reach full retirement age, there are no income limits you have to worry about if you’re collecting Social Security. You could earn $3,000 a year from a very part-time job or $150,000 a year from a consulting job, and your checks won’t be reduced.
If you file for benefits before full retirement age, you’ll be subject to an earnings test. If your wages exceed a certain threshold that changes each year, you may have some of your Social Security benefits withheld. But even so, withheld benefits are paid back to you later. So it could still pay to work even if the risk of withheld benefits exists.
Don’t buy into bad information
Unfortunately, there’s a lot of false information circulating about Social Security. Do your own research or talk to your financial adviser before believing everything you hear.
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