Exposed: 10 Social Security Myths Fooling Retirees in 2024

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Social Security is something that can be a little difficult to get a grip on, especially if you’re depending on it to supplement your income after retirement. With over 62 million Americans aged 65 and older in 2024, as reported by Pew Research Center, Social Security remains a critical lifeline. Many misconceptions cloud the understanding of this program, making it essential to separate fact from fiction.

According to recent data from the Social Security Administration (SSA), almost 65 million Americans receive monthly benefits. However, there is misinformation floating around, causing people to misunderstand what Social Security really has to offer. Read on to debunk ten misconceptions surrounding Social Security.

Your Social Security Benefits Are Tax-Free

Exposed: 10 Social Security Myths Fooling Retirees in 2024 — Image Credit: Polina Tankilevitch/Pexels

Not all Social Security benefits are free from taxation. Depending on other income sources, beneficiaries may owe federal taxes on up to 85% of their benefits. The IRS sets thresholds based on a formula involving adjusted gross income, tax-exempt interest, and half of Social Security benefits.

For instance, the IRS states that individual taxpayers with a combined income of more than $25,000, or $32,000 for couples, may face taxation. State taxation of benefits varies, with some states exempting Social Security entirely while others partially tax it. Retirees need to plan for taxes as part of their overall retirement budgeting.

You Can’t Work and Collect Benefits Simultaneously

Contrary to popular belief, it’s possible to work and receive Social Security benefits simultaneously. For those who haven’t reached full retirement age, there are earning limits that can temporarily reduce benefits. For example, in 2024, Social Security deducts $1 from benefits for every $2 earned above $19,560, as reported by the SSA.

However, once individuals reach their full retirement age, they can earn any amount without affecting benefits. Crucially, any benefits withheld due to excess earnings aren’t lost. Instead, they’re returned through increased benefits once the full retirement age is reached, compensating for previously withheld amounts.

Social Security Covers All Living Expenses in Retirement

Relying solely on Social Security to cover all retirement expenses is a misconception. On average, Social Security replaces about 40% of pre-retirement income, which falls short of what experts recommend for maintaining a similar lifestyle during retirement. The SSA estimates that retirees generally need approximately 70%-80% of pre-retirement income for comfort in retirement.

Usually, additional income sources can supplement the gap (retirement savings, pensions and other investments). It’s important to diversify income streams to be more secure financially into retirement. A broad strategy ensures both basic needs and unexpected expenses are covered.

Claiming Early Won’t Impact Your Benefits in Long-Term

When retirees claim Social Security benefits at 62, they opt for a permanent reduction in monthly benefits, not just a temporary cut. According to CNBC, early claimers lower their benefits by approximately 25% to 30% as they retire before full retirement age.

Delaying until age 70 maximizes monthly payments, which is crucial for ensuring financial security and navigating retirement’s unpredictability. Carefully weigh the benefits and drawbacks of early versus delayed claims, considering immediate needs versus potential future financial implications.

Spousal Benefits Are Automatically Granted

Another misconception is that spousal benefits are automatically granted, yet that’s not the case. Spouses must actively apply for benefits, considering factors such as the primary earner’s work history and claiming age. To qualify, the primary earner’s work record usually needs to have 40 credits, equivalent to about ten years of work.

According to Bankrate, the spousal benefit can be up to 50% of the primary earner’s benefit if claimed at full retirement age. However, claimants taking spousal benefits before their full retirement age will receive less than the full 50% entitlement. Knowledge of these specifics is essential for couples to determine the optimal claiming strategy and maximize household benefits.

Divorce Disqualifies You From Spousal Benefits

Divorce doesn’t necessarily disqualify individuals from receiving spousal benefits. If the marriage lasted at least 10 years and the claimant is currently unmarried (or remarried after age 60), they may be eligible for benefits based on their ex-spouse’s record. The ex-spouse must also be eligible for Social Security benefits, but they don’t need to have claimed them.

The full retirement age varies for these benefits, and early claiming reduces them. This opportunity can provide crucial financial support post-divorce but requires an understanding of eligibility criteria and careful planning to maximize the benefit amount.

Social Security Benefits Are Set in Stone Once Claimed

If necessary, there are circumstances in which retirees can adjust their Social Security benefits even after initially claiming them, contradicting the belief that they’re fixed permanently. Recipients have a one-time option to withdraw their application within 12 months of starting benefits if they can repay the received amounts.

Additionally, individuals can voluntarily suspend benefits after full retirement age to accrue delayed retirement credits, increasing monthly payments when resumed. These strategies require in-depth understanding and are best used as part of a broader financial plan developed with a financial advisor’s expertise.

Social Security Will Run Out of Money Soon

Overlooked StExposed: 10 Social Security Myths Fooling Retirees in 2024ruggles About Getting Older That No One Ever Talks About — Photo Credit: Pikwizard

Despite widespread belief, Social Security isn’t on the brink of total depletion. The SSA projects that the trust funds will continue to pay full benefits until 2034, after which they’ll cover around 78% of benefits through ongoing tax revenue. Calculations by the Congressional Budget Office support this outlook, indicating ample time for policy interventions to sustain the program.

While challenges exist, including a growing number of retirees and fewer workers contributing, effective reforms can ensure Social Security’s viability. Policymakers have several tools, such as adjusting payroll taxes or benefits, to address future deficits. Retirement planning should consider potential adjustments, but widespread panic is unfounded.

You Can Only Apply for Social Security Once You Turn 65

Many believe they must wait until the age of 65 to claim Social Security benefits, but that’s not accurate. According to the SSA, individuals can start claiming as early as age 62, although claiming benefits early results in reduced monthly payments. Delaying benefits beyond the full retirement age, typically 66 or 67, depending on birth year, can increase them by about 8% per year up to age 70.

This flexibility allows retirees to tailor their claiming strategy to best suit their financial needs and health considerations. Understanding this range is crucial for designing a retirement income strategy that maximizes lifetime benefits.

Social Security Adjusts for Inflation Automatically

While Cost of Living Adjustments (COLA) occur to protect Social Security benefits from inflation, they aren’t perfect and don’t always match the actual cost increases retirees face. The SSA measures adjustments using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). However, critics argue the CPI-W doesn’t adequately reflect retirees’ spending patterns, particularly healthcare costs.

According to Forbes, the COLA dropped to 3.2% this year, showing it may not always cover rising expenses like healthcare or housing. Retirees should monitor inflation and plan their budgets to mitigate any shortfalls from insufficient COLA adjustments.

Disclaimer – This list is solely the author’s opinion based on research and publicly available information.