Social Security benefits are likely to be a big part of your retirement plan. Around 63 million Americans will receive approximately $1 trillion in benefits during 2018, according to the Social Security Administration. Yet understanding exactly how this program works, as well as the best time to start taking benefits, isn't always easy. Here are some of the most common misconceptions surrounding Social Security, as well as the truth behind them.
Myth: Social Security will cover my income needs. While the program will provide cash during your retirement years, you'll likely want additional sources of income. Social Security benefits represent approximately 33 percent of the income the elderly receive, according to the Social Security Administration. "Social Security was never designed to be your sole source of retirement income," says Joseph Roseman, managing partner of OWRS Firm in Charlotte, North Carolina.
Your Social Security benefits are based on the earnings you brought in during your working years. "Your ultimate benefit is calculated on the highest 35 years of earning history, with each year being indexed for inflation," Roseman says. You may want more than this amount each month, depending on your housing costs, health expenses, hobbies and travel plans.
Myth: It's better to take Social Security benefits early. In most cases, you can start receiving Social Security benefits any time at age 62 or older. The amount you'll receive each month can vary based on your age. If you start taking benefits right away at age 62, the amount you receive each month will be reduced. For example, someone born in 1960 who is eligible for a $1,000 monthly benefit at 67 can expect to receive just $700 a month, or 30 percent less than the benefit at full retirement age, if he or she begins drawing Social Security at age 62.
Myth: I'll receive full benefits at 65. While age 65 is often considered a common age for retirement, it doesn't necessarily mean you will be eligible for your full benefit at that time. "Full Social Security benefits are not available until you reach your normal retirement age, which may be a later date," says Kurt J. Rossi, president and wealth advisor at Independent Wealth Management in Wall, New Jersey.
To determine your normal retirement age, which is also known as your "full retirement age," consider the year you were born. For instance, age 65 is considered the normal retirement age for those born in 1937 or earlier. Retirees born between 1943 and 1954 have a normal retirement age of 66. Individuals born after 1960 will start receiving full benefits at age 67. "It is important to be aware of your normal retirement age, as claiming benefits early will result in a reduction in the amount you may receive," Rossi says.
Myth: Once I start benefits, I can't work anymore. You're allowed to continue working after you begin receiving Social Security. Keep in mind that your job could impact the amount you receive in benefits, depending on your age and the amount you earn. During 2018, if you're between age 62 and your full retirement age, you can earn up to $17,040 and not have your benefits temporarily reduced. If you make more than $17,040, your benefits will be reduced $1 for every $2 you make above the limit. In the year you turn your full retirement age, the limit climbs to $45,360, and $1 in benefits is deducted for every $3 you earn above the limit. And once you reach your full retirement age, there is no limit on the amount you can earn. So if your full retirement age is 67 and you begin taking benefits at that time, you could earn $50,000 in a year and your benefits won't be reduced. Your monthly amount will also be adjusted to give you credit for payments that were withheld in the past.
Myth: I won't pay taxes on Social Security. Your benefits may be subject to income taxes, but it will depend on your total amount of income. "If your only source of income is Social Security, that benefit is not subject to federal income tax," Roseman says. If you do have other sources of income, add them up, including any wages earned, dividends and retirement account distributions. Then add half of your Social Security benefit amount to that total. If you're single and the amount is less than $25,000, your benefits won't be taxed. If you're married and the amount is less than $32,000, you won't be taxed either. For income levels that are higher, you can expect to pay taxes on part of your Social Security benefit.
Myth: Once I start Social Security, I have to continue receiving it. After you begin receiving Social Security checks, you're allowed to make changes. However, adjustments must be made in a certain timeframe. "If an individual is receiving Social Security benefits and changes his or her mind within the first 12 months, then he or she can [withdraw the application]," says Barry Kozak, consultant at October Three Consulting in Chicago. You'll need to repay the benefits and then file again later. If you change your mind after 12 months, you won't be able to completely start over. If you are normal retirement age or older, you also have the option to temporarily suspend payments and then qualify for bigger payments later.
Myth: My divorce will reduce my benefits. If you were married for 10 years or longer, you could be eligible to receive benefits based on your ex-spouse's work record. To qualify, you'll need to be at least 62 and unmarried. "As long as the retiree meets certain criteria, it may be advantageous for him or her to collect benefits based on an ex-spouse's record, rather than his or her own record," says Rockie Zeigler III, a certified financial planner in Peoria, Illinois. If you qualify and start receiving benefits at your full retirement age, you'll receive one-half of your ex-spouse's full retirement amount.
In cases of divorce, one ex-spouse's actions will not impact the other's benefits. "If a divorcee files for benefits based on an ex-spouse's record, the ex-spouse will never be notified, nor will the ex-spouse ever see a reduction of his or her benefit as a result," Zeigler says.
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