If you don’t understand how the rules and nuances of Social Security work, you may get caught off guard by some Social Security surprises, says Motley Fool’s recent article entitled “Don’t Let These 3 Social Security Surprises Ruin Your Retirement.” Here are some things to keep in mind:
- Taxes on benefits. Many assume that Social Security is not taxed, but it may be, depending on your provisional income. Your provisional income is calculated by taking your non-Social Security income plus 50% of your annual benefit payments. If that total is between $25,000 and $34,000 for a single or between $32,000 and $44,000 for a married couple filing jointly, you could be taxed on up to 50% of your benefits. Moreover, if your provisional income is more than $34,000 as a single tax filer, or $44,000 as a joint filer, you may be subject to taxes on up to 85% of your benefits. Typically, if Social Security is your sole retirement income source, you will avoid having your benefits taxed at the federal level. However, there are 13 states that tax Social Security.
- Withheld benefits when you still get a paycheck. When you hit your full retirement age (FRA), which is when you are entitled to collect your monthly Social Security benefit in full, you can earn as much money as you would like from a job, without having that income impact your benefit payments. However, if you work and collect benefits at the same time before reaching FRA, you may have some of your benefits withheld if you exceed the annual earnings test limit.
You can earn up to $18,960 in 2021 without losing any benefits. Above that threshold, you will have $1 in Social Security withheld for every $2 you earn. If you will be attaining FRA this year, the earnings test limit is higher, $50,520, and after that you will have $1 in Social Security withheld for every $3 you earn.
These withheld benefits are not lost permanently. They are added onto your monthly benefit once you reach FRA. However, claiming Social Security before FRA will also reduce your monthly benefit for life. Bear that in mind, if you are planning to continue working.
- Ultra-low cost-of-living adjustments. Social Security benefits are subject to a cost-of-living adjustment (COLA), which is designed to help seniors keep up with inflation. However, in recent years, it has not. From 2002 to 2011, COLAs averaged 2.43%, but between 2012 and 2021, they averaged only 1.65%. As a result, many seniors on Social Security have had trouble paying their bills. COLAs are tied to fluctuations in the cost of goods and services, but this does not necessarily relate to seniors. Because of this, some lawmakers have been advocating for a better way of calculating them.
If you are planning to depend primarily on Social Security in retirement, be certain that you know the details of the program.
Reference: Motley Fool (Feb. 1, 2021) “Don’t Let These 3 Social Security Surprises Ruin Your Retirement”