Financial Planning
November 12, 2024
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As Social Security remains a vital source of retirement income for millions of Americans, misconceptions about this program persist. These myths can create unwarranted fears or unrealistic expectations and might prevent beneficiaries from maximizing their entitlements. This article aims to debunk three of the most prevalent Social Security myths and underscores why paying closer attention to your benefits is essential.
Myth 1: Social Security Will Soon Be Bankrupt
Reality: While it’s true that the Social Security Trust Fund faces financial challenges, it is not on the brink of bankruptcy. The Social Security Administration is anticipating a cost increase by 2035, which means that benefits will be reduced paying for 75% of scheduled benefits. According to the administration, “This increase in cost results from population aging, not because we are living longer, but because birth rates dropped from three to two children per woman. Importantly, this shortfall is basically stable after 2035; adjustments to taxes or benefits that offset the effects of the lower birth rate may restore solvency for the Social Security program on a sustainable basis for the foreseeable future.”1
Why It Matters: Understanding the ramifications of when you claim Social Security is vital for optimizing your retirement income. Claiming early might make sense for some, but waiting could increase your lifetime benefits.
Myth 2: It Doesn’t Matter When You Claim Benefits
Reality: The age at which you claim Social Security can impact the monthly benefit amount you will receive. You can start claiming benefits as early as age 62, but the amount will be reduced. Waiting until your full retirement age (FRA) – which is between 66 and 67, depending on your birth year – ensures that you receive 100% of your benefit amount. Moreover, delaying benefits until after your FRA (up to age 70) results in a permanent increase, known as delayed retirement credits.2,3
Why It Matters: Being unaware of the potential tax implications on your Social Security benefits can lead to unexpected expenses during retirement. It’s essential to consider these potential taxes when planning your retirement income and consult a tax professional if necessary.
Myth 3: Social Security Benefits Are Not Taxable
Reality: Contrary to popular belief, Social Security benefits can be subject to federal income tax. If your combined income – which includes your adjusted gross income, non-taxable interest, and half of your Social Security benefits – exceeds a certain threshold you may need to pay taxes on a portion of your benefits.4
Why It Matters: Understanding the ramifications of when you claim Social Security is vital for optimizing your retirement income. Claiming early might make sense for some, but waiting could also increase your lifetime benefits.
The Importance of Paying Attention
Social Security is a complex program with rules that affect each person differently. Failing to understand these rules could result in lower lifetime benefits and unexpected costs. It is important to:
Stay Informed: Regularly review your Social Security Statement and stay updated on policy changes that could impact the program.
Plan Accordingly: Use the knowledge you gain to make a robust retirement plan, considering the optimal age to start claiming benefits based on your individual situation.
Consult a Professional: Talk with us! We can help guide you through the nuances of Social Security and help you make decisions that align with your broader financial goals.
