While Social Security typically plays a role in planning for retirement, it’s important to be clear on the specifics of this benefits program. It definitely can be a source of financial support, but there are a few realities to be aware of so you’re not caught off guard when the time comes to make use of these benefits.
Social Security Benefits Fall Far Short of Replacing Income
In fact, Social Security replaces only about 40% of pre-retirement income. When you retire it’s generally advised to have enough money coming in to replace at least 80% of pre-retirement income in order to avoid a major drop in quality of life. Income from sources such as a pension or savings will be needed to fill the gap.
Your Benefits Could Be Taxed
Approximately 50% of retirees pay some federal taxes on their Social Security benefits. This is because their combined income from Social Security and other sources bumps them above the thresholds for taxes to kick in. These thresholds—$25,000 for single people and $32,000 for married joint filers—aren’t indexed to inflation. Due to natural wage increase, more and more people are going to end up with provisional incomes above the stated thresholds, so the percentage of Americans who are required to pay some taxes on Social Security benefits is expected to increase over time.
Medicare Premiums Are Deducted from Your Social Security
If you receive Social Security benefits and you are enrolled in Medicare Part B (the portion of Medicare that provides standard health insurance), the premiums for Medicare are typically automatically deducted from Social Security payments.
Claiming Benefits Early Could Result in Smaller Monthly Checks
If you opt to begin receiving Social Security before your full retirement age, you will not get your standard benefit amount. Full retirement age differs by birth year, but it ranges between 66 and 2 months and 67 years old. Depending on how far you are from your full retirement age when you start claiming benefits, you could fall short of your benefit rate by as much as 30%.
