Social Security is a significant part of most Americans' retirement plans, and it's a central piece in many cases. But there's an alarming number of misconceptions about how the federal program works, and believing these untruths could lead you to make a decision that costs you valuable benefits.
A recent Nationwide survey revealed some common misconceptions people have about Social Security, and we'll discuss five true facts in more detail below.
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1. Full retirement age is somewhere between 66 and 67 for today's workers.
Four in five people that Nationwide surveyed incorrectly chose the age they'd become eligible for full Social Security benefits. This is called your full retirement age (FRA), and while it used to be 65, it's been steadily rising over the years. For today's workers, the Social Security Administration (SSA) determines your full retirement age based on your birth year, per the below chart:
2. Your benefits don't increase at FRA if you start claiming Social Security early.
About 22% of those surveyed by Nationwide believed that if they began claiming Social Security benefits before their FRA, their benefit checks would increase upon reaching FRA. This belief was slightly higher among still-working adults, with 26% anticipating a larger check at FRA. But this is not the way it works.
When you choose to start claiming Social Security, you're making a decision that impacts how much you'll receive in benefits for the rest of your life. You can begin benefits as early as 62, but you'll only receive 70% of your scheduled benefit per check if your FRA is 67, or 75% if your FRA is 66, to account for the extra months you're receiving benefits. Alternatively, you can delay benefits and your checks will increase until you reach the maximum benefit at 70. This is 124% of your scheduled benefit if your FRA is 67 or 132% if your FRA is 66.
Make sure you understand the financial implications of the age you begin Social Security. You can change your mind once within 12 months of signing up if you decide you don't want to start benefits that early, but you must pay back all of the benefits you've received so far and file the appropriate paperwork with the SSA. If you miss this window or you cannot repay the benefits you've received, you're stuck with the checks you've got, which could result in fewer benefits over your lifetime.
3. The average Social Security benefit is $1,421.
Your Social Security benefit is based on your average monthly earnings during your 35 highest earning years with adjustments made for inflation, so yours could vary but the average Social Security benefit is $1,421 per month as of April 2019. About a quarter of retirees surveyed by Nationwide said this was less money than they were expecting.
Still-working adults are going to be in for a rude awakening as they estimated that they would receive around $1,805 per month. That's $384 per month more than the actual average, which adds up to a difference of over $4,600 per year. If these workers aren't saving enough to make up the difference, they could end up without enough money to last them in retirement.
4. The government can tax your Social Security benefits.
More than one-third of those Nationwide surveyed weren't aware that the government can tax Social Security benefits. But it can if your combined income exceeds certain thresholds. Combined income is defined as your adjusted gross income (AGI) -- income minus tax deductions -- plus any nontaxable interest and half of your Social Security benefits.
Individuals with a combined income greater than $25,000 and married couples with a combined income greater than $32,000 could owe taxes on up to 50% of their Social Security benefits. Individuals with a combined income greater than $34,000 and married couples with a combined income greater than $44,000 could pay taxes on up to 85% of benefits. Your state government may also take a cut.
There's a formula that determines how much Social Security benefit tax you may owe, but it's too complicated to explain in this article. Here's a detailed overview for those interested in learning more about Social Security benefit tax.
5. The SSA may withhold the cost of some expenses from your Social Security check.
Less than 1% of those surveyed were able to name all four of the expenses that the SSA may withhold from your Social Security benefits. They are your Medicare Parts B and D premiums, child support, and alimony payments. If you have any of these (and most people will at least have a Medicare Part B premium), the SSA automatically takes this out of your Social Security check, so the actual amount you receive may be less than what you were expecting.
Contrary to what some people surveyed believed, medical and dental expenses and employment taxes are never withheld from Social Security benefit checks. However, if you're working and claiming Social Security at the same time, the government will still take money from each of your paychecks for Social Security.
Know before you start claiming
How many of the five facts listed above did you know? If you were basing your plans for Social Security around one of these misconceptions, take some time to draw up a new plan now. You may need to boost your personal retirement savings rate to make sure you'll have enough money to cover all your expenses.
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