You’ve been contributing to Social Security your whole life, right back to your first official paycheck. Between you and your employers, you’ve doled out 12.4% of your annual income. By now, that’s become a substantial amount, and one that could make your 401(k) look like chump change. Don’t you want to maximize your benefits so you get every penny that’s rightfully yours?
Unfortunately, with a system that is as complicated as Social Security, people make all sorts of incorrect assumptions about how it works. Some are minor while others are way off base and can even be financially devastating. Let’s look at some common Social Security myths and set the record straight so you don’t leave money on the table.
1. Social Security Is Running Out Of Money
Many of us, especially those who won’t be retiring in the near future, are worried that Social Security won’t be around by the time they reach this milestone. Here are the facts: Social Security trust funds have been running a surplus since 1982. Right now, the surpluses are predicted to stop in 2019 and the system will rely on incoming interest payments to make up the deficit until 2034. At that point, if no changes are made, benefit payments may shrink to 75% of what Americans were expecting. (1)
Since you can’t control the success or failure of the Social Security program, educate yourself and plan ahead. Create an account on the Social Security website so you understand your current benefits and know where you stand. There is plenty that could happen between now and 2034 that could impact the program, so don’t believe the assumption that there will be no money left for you by the time you retire.
2. The Money You Contribute Is The Money You Receive
Social Security is not a savings account per se. The taxes that everyone is paying from their paychecks are pooled and then paid out. Your contributions are supporting others and when you retire, the money others pay into the system will support you.
In 1960, the amount of contributing workers-to-beneficiaries was 5:1. In 2013, it was 2.8:1. (2) So while the number of workers paying Social Security is decreasing, there are still more paying in than receiving benefits. As time goes on and the life expectancy of our population increases, you may need to mentally prepare for your benefits to be less than you what you think they will be.
3. Everyone Contributes Equally To Social Security
Everyone pays 6.2% out of their paychecks to fund Social Security (with their employer paying another 6.2%), with an earnings cap of $127,500. So if you earn that amount, and your neighbor earns $5 million, you will both pay the same Social Security deduction of $7,886.40. (3) If this earnings cap was eliminated, it’s estimated that 71% of the trust fund shortfall could be wiped out.
4. 65 Is The Magic Number
Social Security benefits can be claimed anytime between ages 62 and 70. However, the timing of when you choose to collect these benefits will impact the amount of benefit you receive.
Full retirement age (FRA) changes based on the year you were born. For those born in 1937 and earlier, FRA is 65. After 1937, two months is added each year until FRA becomes 66 for those born between 1943 and 1954. Starting in 1955, two months a year is added again until the FRA becomes 67 for those born in 1960 or later.
If you wait until you reach full retirement age to begin collecting your Social Security benefits, you will receive your full Primary Insurance Amount, which is the full benefit that you have earned. For more information on understanding your benefits, click here.
5. Your Benefit Amount Is Fixed
For every year beyond your FRA that you delay taking benefits, the value increases by 8% until you reach age 70. There is nowhere else you can get an 8% return guaranteed by the U.S. government! If you retire early, benefits may be about 30% less, which means you could be leaving a significant amount of money on the table.
6. Social Security Benefits Aren’t Taxable
While Social Security benefits are not normally taxed, they could be taxed by up to 85% if you are working or have other sources of income while you are collecting benefits. Any income you earn before the year in which you reach FRA reduces your Social Security benefit once it surpasses a set yearly earnings limit. For 2017, the limit is $16,920. Once you begin earning more than the limit, your Social Security benefit will be reduced by $1 for every $2 you earn.
The income restrictions change in the year in which you reach FRA. That year there is a higher limit: $44,880 for 2017. Once your income supersedes that limit, your Social Security benefit will be reduced by $1 for every $3 you earn. As soon as you have your birthday and reach FRA, though, there are no more limits. You can earn as much as you want and it has no effect on your Social Security retirement benefits.
7. Your Claiming Decision Is Not Set In Stone
A shocking 38% of people incorrectly believe they can switch their claiming strategy after they’ve made their official choice. (4) This just isn’t true. According to the Social Security website, you can withdraw your claim once within 12 months after applying, but you must repay all the benefits you received during that time. (5)
8. Your Claiming Strategy Affects Your Ex-Spouse
Many people don’t realize that their ex-spouse’s claiming strategy has no bearing on their own benefits. If you are married for 10 consecutive years and haven’t remarried, you are entitled to either your full benefit or half of your former spouse’s benefit, whichever is greater.
9. There Is No Deadline To Apply For Benefits
If you want your first Social Security check next week but haven’t yet applied for benefits, you are out of luck. You must file for benefits 3 to 4 months before you get your hands on your money.
Avoid A Social Security Headache
Social Security is a major piece of your retirement game plan. It was designed to replace 40% of an average worker’s wages, and that’s money you don’t want to miss out on. There is no one-size-fits-all claiming strategy, so it’s critical to work with an experienced professional.
At D. Bryant Retirement Strategies, we offer comprehensive Social Security and retirement planning to help you create a steady income stream that provides for you and your family in your retirement years. If you want to maximize your Social Security benefits and plan for a predictable retirement, call us at (402) 932-2141 or email firstname.lastname@example.org and sign up for your free Social Security strategy planner.
Darrell Bryant, CFS®, CAS® is Omaha’s Retirement Strategist. As the founder of D. Bryant Retirement Strategies, he focuses on helping individuals and couples nearing retirement do so successfully. Along with more than 30 years of experience, he received the Certified Fund Specialist (CFS®) designation and a Certified Annuity Specialist (CAS®) designation from the Institute of Business & Finance. Passionate about helping as many people as possible in his community, he hosts Retirement Strategies Radio, heard Saturday mornings at 8 a.m. on 1110 KFAB. He has also written articles on financial planning that have been featured on Fortune.com, FoxBusiness.com, Money.com, and in the Midland Business Journal. To learn more, visit his blog, his website, or connect with him on LinkedIn.