Avoid These Common Social Security Myths And Save Big

For years, people have misunderstood Social Security, leading to two big myths: one, that the program is failing and you should grab your benefits ASAP, and two, that you can't work while you receive benefits. These can cause one to make poor decisions about when to retire or start claiming benefits. For instance, the mistaken belief that Social Security will soon run out of money might make you claim your benefits early, which will reduce your income over your lifetime. On the flip side, waiting too long based on wrong assumptions could also mean missing out on necessary funds.

If you ever get confused abut any Social Security information visit trustworthy sources like the official Social Security Administration website or financial news sites like Money Digest for the real scoop on common myths and how you need to plan for new updates. This way, you can squeeze the most out of your benefits and tweak your retirement strategy with solid facts, not just hearsay. Having accurate info will help you make choices that really fit your financial dreams.

First up on the myth-busting list: the idea that Social Security benefits alone can fully cover your retirement costs. This belief can leave big holes in your retirement plan because Social Security is meant to be a safety net, a trampoline to lift up your finances in trying time, not a landing pad. Typically, social security benefits can or should only cover about 40% of an average retiree's monthly expenses.

Let's prove this. The average monthly Social Security check is around $1,500, but retirees usually need between $3,000 to $4,000 a month to live on. So, banking just on Social Security could leave you short, struggling to handle unexpected bills, rising healthcare costs, and keeping up the lifestyle you're used to. Yet, about 20% to 30% of retirees lean on Social Security as their main income source. Not a great way to handle economic ups and downs and sudden expenses.

Instead, beef up your retirement plan and look into personal savings accounts, investment portfolios, and if you're lucky enough to have them, employer-sponsored plans like 401(k)s. These plans are your retirement's VIP pass, paying out based on your work history and earnings, ensuring you cruise smoothly into your golden years. Start saving for retirement early, invest wisely, and have different sources of income.

You might believe what you receive after retirement is based only on what you earn in the last few years before you retire. Actually, the Social Security Administration looks at your highest-earning 35 years. Here's how it works: your highest 35 years of earnings are tallied and divide by 420 (35 years times 12 months) to find your Average Indexed Monthly Earnings (AIME). Then, the SSA uses "bend points" to figure out your Primary Insurance Amount (PIA). The first step takes 90% of your earnings up to $1,115. The next step takes 32% of what you made between $1,115 and $6,721. And anything you made over $6,721? Only 15% factors in. This all adds up to your monthly check.

Imagine two workers: one consistently earns $50,000 a year for 35 years. The other starts at $20,000 for 20 years and then jumps to $100,000 for the last 15. Although the second worker's later salary is higher, Social Security calculates benefits using the best 35 years of earnings. The low-earning years lower the average, so the steady earner might get a bigger Social Security check. It shows steady earnings can pay off. In fact, you can "unretire" — come out of retirement to work again, but this will affect your benefits.

When you claim Social Security early, it affects your benefit amount. Think of it like timing when you jump into a game of double Dutch. If you jump in early, at 62 instead of your full retirement age of 67, it's like catching the ropes at a tricky spot — an earner could end up with about $2,831 a month instead of the full $4,018. That's a permanent trim of up to 30%. But if you wait it out and jump in later, say at age 70, the ropes swing your way, boosting your benefits by 8% each year you delay. That patience could bump this monthly check up to around $5,108.

When you decide whether to delay claiming benefits, think of it as figuring out when the waiting game pays off. Typically, if you're around 78 to 80 years old, that's when you break even. This means if you wait until after 70 to claim, those bigger monthly checks will have been worth the wait, outweighing the smaller amounts you skipped earlier. It's all about playing the long game — if you see yourself hitting a ripe old age, holding off on those benefits could lead to a heftier total payout.

Some folks think that if you don't work, you don't get any Social Security benefits. But that's not the whole story. If you're married and haven't worked or earned less than your spouse, you could still grab up to 50% of your partner's Primary Insurance Amount when you both reach full retirement age. Now, if your better-earning half decides to claim their benefits early, your slice might shrink a bit, but it doesn't take anything away from their work history or the benefits based on it. So, even if you stayed out of the workforce, you're not left out in the cold when it comes to Social Security.

If a working spouse passes away, the other half can collect their full Primary Insurance Amount (PIA) when they reach full retirement age. But, if they jumped the gun and started claiming their own benefits early, they might not get as much as they hoped. To be eligible for these benefits, the couple needs to have been hitched for at least 10 years. If both were getting their own Social Security checks, the survivor has the choice to pick the bigger amount.

Social Security checks are not a free pass from taxes. Depending on how much you make, where you live, and how you file, you might have to pay Uncle Sam a piece of your benefits. The Social Security Administration looks at your adjusted gross income, any non-taxable interest you're earning, and half of your Social Security payments to decide if your benefits get taxed. If you're pulling in $25,000 to $34,000 a year, you might need to pay taxes on up to 50% of your benefits. Earn more than $34,000? Then up to 85% of your benefits could be taxed. For families, those making between $32,000 and $44,000 could see half their benefits taxed, and families earning over $44,000 might have to fork over taxes on about 85% of their benefits.

Time how you withdraw from your retirement plan to save a bundle on taxes. Stay below income limits to reduce your tax bill. If you're over the limit, minimize taxes by not tapping into flexible accounts like IRAs or 401(k)s. Plus, understanding state tax laws on Social Security benefits can guide you on where to retire and how to manage your money — some states don't tax Social Security at all. Contact a tax or financial planner to get a personalized strategy that helps with both your federal and state taxes.

Another common myth is Social Security is about to go broke, but that's not seeing the whole picture. The truth is, Social Security has a trust fund specifically for Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI), that's kept flush with cash from payroll taxes and other money coming in. In fact, recent numbers from the Social Security Administration show these trust funds have a balance of $2.9 trillion.

Yet, we can't deny that if nothing changes in the laws, the trust funds are expected to dry up by 2034. But don't panic — this doesn't mean Social Security will stop paying out. The money collected from payroll taxes is predicted to cover about 75% to 80% of the benefits, so even if funds get tight, beneficiaries would still get a good chunk of what they're expecting, just not the full amount.

Meanwhile, experts and lawmakers are cooking up solutions to keep Social Security stable. They're talking about tweaking payroll taxes, changing how benefits are calculated, and maybe even adjusting the retirement age. For instance, legislative proposals such as the Social Security 2100 Act have been introduced, which include provisions to increase the taxable maximum for Social Security taxes and expand the definition of taxable income, among other changes. These steps are all about making sure the trust funds last longer and keeping Social Security as a reliable source of income for millions of Americans.

Many believe younger generations won't see a penny from Social Security, fearing an aging population and money problems will drain the system dry. But Social Security is designed to adapt. Policy makers are constantly fine-tuning the program, adjusting rules and strategies to ensure it remains a lifeline for future retirees. So, don't count it out just yet.

Social Security gets its funding from payroll taxes, and its stability relies on the balance between workers and retirees. Right now, there are almost 2.8 workers paying in for every retiree getting benefits. But as people have fewer kids and live longer, that number is shrinking. On average, each woman in the United States is expected to have about 1.79 children during her lifetime. This does create some challenges, but experts believe payroll taxes will still cover 75% to 80% of future benefits. Overall, younger people shouldn't worry — they'll still get benefits, though some changes may be needed to keep things running smoothly.

New plans are being made to keep Social Security strong. These include small changes to the payroll tax rate, raising the limit on earnings that get taxed, and tweaking how benefits are calculated. This way, those who earn more might contribute a bit more, but it won't affect most people's paychecks.