Myths of Social Security
Myths of Social Security
The rules around Social Security are complicated, but avoiding these common myths and understanding your options fully before claiming is well worth your time. Keep reading to get the real deal on Myths of Social Security and make the choice that maximizes your benefits.
Hey, you thinking of claiming your Social Security benefits already? Hold up, not so fast. There are some Social Security myths that could lead you to make a decision you regret.
Turns out, claiming early isn’t always the best strategy, that ‘break even’ age calculation isn’t very useful, cost-of-living adjustments aren’t guaranteed, your benefits may well be taxed, and you probably can’t make the optimal choice on your own.
Myth 1: Claiming Early Is Best Is One of the Big Social Security Myths
Claiming your Social Security benefits early may seem tempting, but it reduces the total amount you receive over your lifetime. The Social Security Administration determines your full retirement age based on your birth year. If you claim before that age, your monthly benefit is permanently reduced.
For example, if your full retirement age is 66 but you start claiming at 62, your monthly benefit will be reduced by about 30 percent. While you’ll receive checks for an additional 48 months, the reduction in your benefit amount means you’ll receive less in total lifetime benefits. The break-even age, where the larger benefit amount makes up for the years of missed benefits, is often much older than most people realize according to Social Security facts and myths.
Some believe that even with a reduced benefit, they’ll at least get cost-of-living adjustments to help offset inflation. However, those adjustments are a percentage of your current benefit amount. So if your benefit starts lower because you claimed early, your cost-of-living increases will also be lower. Over decades of retirement, that can significantly impact your spending power.
While there are good reasons for some to claim Social Security early, especially those with health issues or financial difficulties, for most the math clearly favors delaying benefits as long as possible. That doesn’t mean you have to wait until age 70, but even delaying a few years beyond 62 can make a big difference in your lifetime benefits and financial security. The choice is complex, so take the time to evaluate your own situation. Don’t just assume that claiming early is your best or only option.
Myth 2: My ‘break even’ age tells me when to claim – 10 Myths of Social Security
You’ve probably heard that your ‘break even’ age — the age at which the total amount of benefits received equals the total amount of benefits forfeited by claiming early — should determine when you claim Social Security. But that reasoning ignores some important factors.
Claiming early means smaller checks for life. By claiming at age 62 instead of your full retirement age of 66 or 67, your monthly benefit can be reduced by up to 30%. Those smaller checks continue for as long as you receive benefits, typically into your 80s or beyond.
Your break even age doesn’t account for cost of living adjustments (COLAs). Social Security benefits increase with inflation, usually 1-3% per year. If you claim early, your smaller benefit is locked in place, so you miss out on years of potential COLAs that could have boosted your benefit.
Interest and investment returns matter. If you claim early, you have fewer years left for your nest egg to potentially grow before you need to start withdrawing money. By delaying claiming, you give your investments more time to gain value and generate returns.
Your life expectancy is uncertain. While government stats can estimate average life spans, no one knows for sure how long they’ll live. If you outlive your break even age by 10-20 years or more, as many people do, the financial loss from claiming early can be huge.
In the end, your break even age is just one factor among many in the complex claiming decision. Don’t rely on it alone. Consider your health, finances, and family longevity to make the choice that’s right for your situation. The few years you wait beyond 62 can have an enormous impact on your retirement security. This is one of the Social Security myths that is hard to get across
Myth 3: Claiming now will give me a cost-of-living adjustment
When it comes to claiming benefits, there are a lot of Social Security myths floating around that could lead you to make a less than optimal choice. One myth is that if you claim early, you’ll get an annual cost-of-living adjustment or COLA and make up for the lower benefit. However, the truth is that COLAs are applied no matter when you claim.
COLAs increase benefits at the same rate for all
COLA increases are applied as a percentage of your current benefit amount. So while claiming early at age 62 will give you benefits right away, your monthly benefit will be up to 30% less than if you waited until full retirement age. The COLAs applied in following years will then be a percentage of that already-reduced amount.
Waiting until 70 to claim will give you the highest benefit possible, and future COLAs will be based on that higher amount. Over the years, the difference in total benefits received between starting at 62 vs 70 can really add up. For example, if your benefit at 62 is $1,000 but $1,500 at 70, after just 5 years of 3% COLAs:
- At 62, your benefit would be $1,153 (starting $1,000 + 5 years of 3% COLAs)
- At 70, your benefit would be $1,801 (starting $1,500 + 5 years of 3% COLAs)
That’s over $600 more in monthly benefits just for waiting 8 more years to claim—a difference that will continue to grow over time. While it may be tempting to take the money and run at 62, for most the smarter choice is to wait if you can.
The bottom line is that no matter when you claim Social Security, you’ll receive COLAs. However, your COLAs will be a percentage of the benefit amount you lock in by claiming at that age. So choose your start age wisely, as that decision can impact your total lifetime benefits in a big way.
Myth 4: Social Security benefits are not taxed – Social Security Facts & Myths
Many people assume Social Security benefits are tax-free income, but that’s not the case. Up to 85% of your Social Security benefits may be taxable, depending on your income.
How it works
The IRS uses a calculation called “combined income” to determine if and how much of your Social Security benefits may be taxable. Combined income is your adjusted gross income + nontaxable interest (like municipal bond interest) + 1/2 of your Social Security benefits.
•If your combined income is between $25,000 and $34,000 ($32,000 and $44,000 for married couples), up to 50% of your benefits may be taxable.
•If your combined income is more than $34,000 ($44,000 for married couples), up to 85% of your benefits may be taxable.
•If you’re single with an income below $25,000 or married with an income below $32,000, your benefits are not taxable.
The tax rate on your Social Security benefits depends on your tax bracket. So you’ll want to consider your potential tax liability when making a claiming decision. While delaying benefits will result in a higher monthly payment, it also means more of your benefits may be subject to taxes when you do claim. Thanks to greedy, reckless spending, politicians, these benefits that were taxed when we earned them, are taxed again.
Strategies to reduce taxes
There are a few ways you may be able to reduce the taxes on your Social Security benefits:
•Spend money from tax-advantaged accounts like Roth IRAs, HSAs or tax-free municipal bonds. Distributions and interest from these sources do not count as income for determining if your Social Security benefits are taxable.
•Donate to charities. Charitable contributions may lower your adjusted gross income, potentially making less of your Social Security benefits taxable.
•Delay claiming Social Security. If you can delay benefits beyond your full retirement age, your benefits will continue to grow by delayed retirement credits of 8% per year. The higher benefit amount will mean the threshold where your benefits become taxable may increase as well.
While paying some taxes on your Social Security benefits is often unavoidable, planning ahead can help ensure you get to keep more of your hard-earned benefits. Talk to your financial advisor about strategies to make the most of your Social Security income.
Myth 5: I can make the best claiming decision
When it comes to claiming your Social Security benefits, the decision is too important to go it alone. Myth 5, that you can make the best claiming decision on your own, is false. Working with a financial advisor who specializes in Social Security claiming strategies can help you maximize your benefits.
Expert Advice Is Key
Social Security rules are complicated, and there are many factors to consider regarding your own situation. A financial advisor has the experience and software tools to analyze how your age, marital status, health, life expectancy, income needs, and other variables should influence your claiming decision.
They can determine your “break-even” age, the age at which the total lifetime benefits of two different claiming strategies are the same. For most people, this ends up being well into their 70s or even 80s.
Spousal Benefits Matter Too
If you’re married, coordinating with your spouse regarding when each of you should claim benefits becomes even more important. There are rules around spousal benefits, survivor benefits, and deemed filing that can be optimized with strategic timing of when each spouse claims their own benefit.
An expert can evaluate scenarios to determine the strategy that maximizes household benefits over two lifetimes.
It’s Not Just About the Monthly Check
For most retirees, Social Security benefits make up a major portion of income during retirement. The claiming decision affects not just your monthly benefit amount but also impacts taxes, healthcare costs, and long-term financial security.
There are many trade-offs to consider regarding your needs now versus later in retirement. An advisor can take all these factors into account to recommend an optimal strategy tailored to your situation.
While no one has a crystal ball, working with an expert advisor is the smartest way to make an informed decision about one of the most significant retirement choices you’ll make. Let an expert help demystify Social Security and determine the best path forward for your financial future.
So while those myths about Social Security benefits are common, the reality is often more complicated. The truth is, the claiming decision is highly personal and depends on your unique financial situation and needs in retirement.
There’s no one-size-fits-all answer. The key is to make an informed choice by understanding how your benefits are calculated and the trade-offs of claiming at different ages.
You’ve worked hard for decades to earn these benefits – do your homework and choose the strategy that will provide you the most financial security and peace of mind in your golden years. Your future self will thank you.
Social Security was supposed to be in a Trust Fund for its recipients, but thanks again to corrupt politicians, it’s used as a slush fund for their desires. It started back in 1968 when it was used to finance the Vietnam war. What’s more, why is this trust Fund on the Federal budget? It’s estimated that the government has “borrowed” two trillion dollars from this fund. Then they constantly tell us that the fund will be insolvent in a few years. If true, is it any wonder?
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