Social Security shouldn’t be your only income source in retirement – it wasn’t set up that way and will not replace 100 percent of your pre-retirement income. However, as a guaranteed supplement to your retirement cashflow, Social Security is a common pillar of one’s comprehensive financial planning.
There are a lot of questions surrounding Social Security, and as a Registered Social Security Analyst with the National Association of Registered Social Security Analysts, I’ve heard a lot of misconceptions about how these benefits work.
Failing to understand crucial details about Social Security can be costly. Having a firm understanding of your Social Security benefits helps you form a better financial plan and obtain greater peace of mind during retirement.
To help you avoid common misconceptions about Social Security, I want to tackle 5 common myths you should be aware of.
Myth #1: Social Security Will Be Enough to Cover You in Retirement
One of most straightforward myths about Social Security can be the most dangerous to your retirement. For a number of different reasons, many people believe that Social Security alone will cover their spending and expenses during retirement. Unfortunately, Social Security is a supplement at best, and spending statistics prove this.
Reports show that most retirees will spend between 70 and 80 percent of their annual pre-retirement income every year once they stop working, with some of the bigger variables being healthcare costs and overall spending habits. This means that if you were earning between $70,000 and $100,000 per year during your working years, then your spending will range from $44,000 to $70,000 during retirement.
The average Social Security benefit is $1,543 per month, which adds up to only $18,516 in a year. This amount may be significantly less than 70 percent of your pre-retirement income. Not everyone’s benefit is the same, of course, but it’s important to see how much of a shortfall you will have after receiving your Social Security benefits.
Here’s another scary thought: The average Social Security payout is only 30 percent higher than the poverty rate. The key takeaway here is you should have other sources of income to maintain your quality of life during retirement, especially if you’re a high net worth individual.
Myth #2: Social Security Benefits are Not Taxed
Another not-so-fun fact about Social Security is that it is indeed taxable.
Like any other tax rules, there are specific parameters that affect taxability, like income. You are liable for taxes on your Social Security benefits if your income is more than $25,000 as an individual, or $32,000 as a married couple filing jointly. Once you reach this threshold, the amount of taxes you pay changes based on your income level.
If your income is between $32,000 to $44,000 (married, filed jointly) you can be taxed up to 50 percent. This number increases to 85 percent if your income exceeds $34,000 as a single person, or $44,000 if you’re married filing jointly.
To add even more confusion, there are 13 states that will tax your Social Security benefits as well. While North and South Carolina are not one of them, many residents of the Carolinas have relocated here from another state.
If you are unsure how taxes will affect your Social Security benefits, you’ll be unpleasantly surprised when you receive a net benefit, instead of the full amount you may have been counting on.
Myth #3: If You’re Divorced or Widowed, You’re not Eligible for Spousal Benefits
Your benefits as a former spouse go much further than you think. But, like taxes, there’s set criteria.
If you’re divorced, you are eligible to receive benefits based on your ex-spouse’s work record, as long as you were married for at least 10 years, you’re currently unmarried, and you’re 62 or older.
Widows are covered, as well. Widows who were married to someone who worked long enough under Social Security are eligible to receive reduced benefits as early as age 60 (50 if you’re disabled), and full benefits at age 70. Should you get remarried, your new marriage will not affect your eligibility to receive survivor benefits.
Myth #4: You Should Hold Off As Long As Possible
When it comes to Social Security, it is true that the longer you wait, the more you’ll receive. However, it doesn’t mean that everyone should wait until age 70 to receive the maximum benefit. There can be a few reasons why waiting longer to take Social Security can be misguided.
For starters, if you have longevity concerns, be it from genetics or healthcare challenges, waiting to take Social Security may not the right decision for you, because the extra benefits from a few additional years may not be worth the wait, depending on your health and financial situation.
Furthermore, if you have ample savings, the amount you receive if you started taking Social Security in your mid-60s can also work just fine for your financial plan. Turning 65 has a unique perk for your Social Security benefits. At this age, you are eligible to begin receiving Medicare and can actually pay your Medicare Part B premiums by deducting the amount from your Social Security check, which may be easier and more convenient to manage.
Have a thorough conversation with your financial advisor to see how close you are to your retirement planning goals. This can be a great way to more-clearly see how much of an impact Social Security benefits will have on your retirement.
Myth #5: You Should Take Benefits As Soon As Possible
The final myth falls on the opposite end of the spectrum from the previous one. Taking your Social Security benefits too early can significantly cut into your benefits during retirement.
The earliest you can take Social Security benefits is age 62. While it’s great that you are eligible for this lifetime benefit, the amount is heavily reduced if you take it as early as possible. Since the amount increases every year, maxing out at age 70, it literally pays to wait. Electing to receive Social Security benefits at age 62 versus age 67 can mean a difference of nearly 30 percent in payouts.
Ultimately, the best approach to deciding when to take your Social Security benefits is to take stock of your financial life and retirement plan. Work with your financial advisor to create a specific expectation based on your situation by accounting for your annual spending in retirement and expected rate of return based on your portfolio.
Letting your financial advisor run the numbers with respect to your Social Security age can give you a glimpse into the best time to take your benefits. If you have a sizable amount of savings, your decision about Social Security can become much easier. Preparing early for retirement will give you a great shot at living comfortably and having your needs accounted for.
If you’re not currently working with a financial advisor in the Carolinas or feel it’s time to make a change, give us a try. The team at Global View is ready to help.