Don't let these 4 Social Security surprises ruin your retirement

When you make your retirement plans, chances are good you'll expect Social Security to be an important source of financial support. But while there's nothing wrong with relying on this entitlement program, you can't afford to be unrealistic about what it can do for you.

To make sure you aren't left in dire financial straits because you have an overly rosy perception of Social Security, make sure these four realities of the benefits program don't come as a surprise.

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1. Social Security replaces only 40% of pre-retirement income

If you're counting on Social Security to be the only income source you need to retire, you are in for a very unpleasant wake-up call.

Most financial experts advise retirees to ensure they have enough money coming in to replace around 80% of pre-retirement earnings. That's necessary to avoid a major decline in quality of life, especially as retirees often face new expenses such as additional healthcare costs.

Social Security simply isn't designed to provide 80% of earnings. It's meant to replace about 40% of pre-retirement income with the rest of your money coming from a pension or savings. If you don't have income from these other sources, you're going to have a hard time covering the necessities.

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2. Your benefits could be taxed

Since you fund Social Security with tax payments, you're probably not expecting the IRS to come calling once you start collecting benefits. But around 50% of retirees pay some federal taxes on their benefits, and that number will only grow over time.

That's because the thresholds at which benefits become partially taxable -- $25,000 for single people and $32,000 for married joint filers -- aren't indexed to inflation.

Now, only "provisional" income counts, which is half your Social Security benefits, all taxable income, and some non-taxable income. But due to natural wage growth, more and more people are going to end up with provisional incomes above the stated thresholds, and they will all end up losing some of their benefits to taxes. That could come as a huge shock if you aren't expecting it.

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3. Medicare premiums come out of your Social Security checks

Many seniors have Medicare premiums automatically withdrawn from their Social Security checks, and this is yet another instance where you don't want to be caught by surprise with benefits lower than you thought they would be.

Unfortunately, healthcare inflation tends to increase more than the periodic Social Security Cost of Living Adjustments (better known as Social Security raises). While there are rules in place to prevent Medicare premiums from rising more than the annual Social Security benefit increase, there are many years when seniors see hardly any extra money in their checks, because their entire benefit bump is eaten up by rising Medicare costs.

4. Starting them early could shrink your income

Finally, you may not realize that if you start receiving Social Security before your full retirement age, you'll get less than your standard benefit amount. Full retirement age varies by birth year, but it falls between 66 and 2 months and 67 years old.

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If you don't know when your FRA is or don't know that claiming early can reduce your benefit by as much as 30%, you could have a big problem. You may end up having to work longer to delay a benefits claim and avoid a significant reduction in Social Security income -- or end up having to accept much smaller monthly checks than you'd hoped for.

It's crucial you're prepared for all of these realities and you have plenty of supplementary savings so you can cope with the fact Social Security benefits may not go nearly as far as you originally believed.

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