Social Security is full of pleasant surprises. For example, did you know that the benefit you start collecting is not the same amount that you are committed to for life? That’s because seniors with Social Security are entitled to cost-of-living adjustments that can lead to higher paychecks.
Here’s another fun fact about Social Security. If you defer your application past your full retirement age (FRA), you can get an 8% increase in your benefits for each year you defer, until you turn 70. And you can enjoy that higher benefit forever.
But while there are certainly some positive surprises associated with Social Security, there are also some less positive ones. Here are a few that can really throw you for a loop if you’re not prepared.
1. Benefits have limited purchasing power
Many people assume that their Social Security benefits will completely replace their previous paycheck. wrong.
If you’re an average earner, you can expect your benefit to replace about 40% of your pre-retirement income. Meanwhile, most seniors need about double that to support themselves. And so if you’re not just saving for retirement, you may struggle to manage your bills.
2. Benefits are subject to taxes
We just learned that Social Security is nowhere near replacing your former paycheck. Well, here’s even worse news: you may not fully retain your benefits.
If you’re a moderate earner, you could lose some of that income to federal taxes. And there are also 13 states that tax Social Security, so if you retire in one of those states, you might lose even more of your money.
3. Benefits can be withheld if you work and earn too much
You may collect Social Security even if you are still working. But if you do this before reaching FRA, you risk having some of your benefits withheld if you make too much money.
In 2022, you can make up to $19,560 without that income affecting your benefits. From there, you have withheld $1 in Social Security for every $2 you earn.
If you reach your FRA in 2022, that limit will rise to $51,960. From there, you have $1 in Social Security withheld for every $3 you earn.
Keep in mind that withheld benefits are not lost forever. They will be refunded to you later, once you reach FRA.
But if you claim Social Security for FRA, that alone will permanently lower your benefits. And so if you want to take that charge early, you may want to take steps to avoid having some of that money withheld from you.
Social Security is a complex program that is full of rules, so you never know when you will come across new information about it. While some of the Social Security surprises may be welcome news, the above surprises can really mess up your finances, so it’s important to prepare for them before you retire.
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