Most people are familiar with Social Security -- at least in theory. But there's a lot of mystery surrounding it, fueled in part by rumors about the program's somewhat shaky future. Getting your facts aligned can help you make the most of your Social Security benefits, even if you aren't set to collect them for years. With that in mind, here are a few common Social Security myths you shouldn't fall for.
1. Social Security is going broke
You may have heard or read that Social Security is running out of money, and that it won't be around by the time today's younger workers retire. But that's just plain not true. Social Security is facing a significant shortfall, particularly because its trust funds, which help sustain the program, are set to run dry by 2034. But even once that happens, the Social Security Administration expects to take in enough tax revenue to pay close to 80% of scheduled benefits.
Image source: Getty Images.
Is a 20% benefits reduction ideal? Obviously not, especially given the number of seniors who count on those checks to pay the bills. But that 20% reduction also assumes that Congress won't intervene in the next 17 years and implement some sort of fix.
Now in some ways, believing in Social Security's imminent demise is a good thing for younger workers, as it might serve as an impetus to save more aggressively. But this particular myth can really hurt seniors whose fear might prompt them to claim benefits earlier than necessary. Though you're allowed to collect Social Security as early as age 62, doing so will slash your benefits significantly, and that reduction will remain in effect for the rest of your life. Rushing to take benefits before reaching full retirement age could cause you to struggle financially as a senior, so don't do it simply because you want to get your hands on that money before it disappears.
2. Social Security benefits aren't taxable
While it's true that some seniors don't pay federal taxes on their Social Security benefits, this only applies to those who don't have much outside income. But if you have savings, investments, or income from a part-time job, you might lose a portion of your benefits to taxes.
To see whether you'll be taxed, you'll need to calculate your provisional income, which is your non-Social Security income plus half the value of your annual benefits. The following table will give you an idea of whether you'll face Social Security taxes based on your total:
Data source: IRS.
In additional to federal taxes, you might pay state taxes on your benefits if your state is on this list. Planning for Social Security taxes can help you better manage your money at a time in your life when every penny counts.
3. You can live off your Social Security benefits alone
According to the Economic Policy Institute, more than 40% of baby boomers nearing retirement have yet to start saving independently. And a big reason for this trend boils down to misinformation about Social Security -- namely, that you don't need more than your monthly benefits to pay the bills in retirement. The reality, however, is that Social Security is only designed to replace roughly 40% of the typical worker's pre-retirement income.
Now if you're willing to live a really frugal lifestyle as a senior, you might get away with spending as little as 60% to 70% of what you previously did during your working years. But most seniors need at least 70% to 80% of their former income to stay afloat financially, and many require even more. If you don't save enough to bridge the gap between the income Social Security will provide and the amount you actually need, you'll be setting yourself up for a cash-strapped retirement.
Currently, 21% of married beneficiaries and 43% of single beneficiaries 65 and over count on Social Security for 90% or more of their income. At the same time, an estimated 25 million seniors are presently living below the poverty line. Being realistic about Social Security is the first step toward developing a personal savings plan whose income will be critical once you retire.
Unfortunately, there's a host of bad information about Social Security out there to lead you astray. Learning the truth about this key program can help you prepare for the future while avoiding costly mistakes.
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