Social Security Benefits: What You Don’t Know Can Hurt You

We all know about Social Security benefits and some of the problems the administration faces with an increasing drain on its funds. In fact, it is starting to run out of money to continue to pay 100% of the expected benefit amounts. The date when that will happen is around 2032 and that is just a decade away!

Signing of Social Security Act to establish Social Security benefits

You likely know that bad news because it’s always being discussed in the press. In reality, it’s existed for years but so far no fixes have been made to it. However, knowing those facts isn’t enough to fully understand Social Security benefits and how they work and what you don’t know about Social Security can hurt you!

How Little We Actually Know Is Documented

Whether you’re counting on Social Security benefits to fund most of your retirement income or just supplement it, you want to make sure you get all of the money to which you’re entitled. However, with so many ways to claim benefits, especially if you’re married or used to be married, small mistakes can end up costing you a lot of money over the rest of your life, as much as tens of thousands of dollars.

A recent poll by MassMutual said that over one-third of soon-to-be retirees (ages 55 to 65) failed to understand all of the facts about it. Another 18% earned a grade of D on basic knowledge about Social Security retirement benefits. Amazingly, only 3% received an A+ by answering all twelve true/false statements correctly.

You may think you know all of the ins and outs of Social Security benefits and that you will take full advantage of them and avoid leaving money on the table, but do you?


The word retirement is bantered about in the personal finance space quite often. F.I.R.E is one source of this talk. It stands for Financial Independence, Retire Early.

Realistically, even if you have been so successful that you can financially afford to retire at age 30, 40, or 50, you will not yet qualify for Social Security benefits. Plus you will probably want to do something to keep active. You’ll still require an income of some sort and it isn’t likely that you will never have to think about earning any money again just because you were able to leave a job and declare F.I.R.E.

Most F.I.R.E. folks know that and have alternate sources of income that keep them financially sound even if it isn’t a full-time 9-5 job. These alternate streams of income work well and you need to find them too even if you are not going to retire at 30 or 40.

It can be investment income, retirement plan income, a part-time side “gig”, or any way you can legally think of to earn some “extra” money. This alternate income will help you achieve your dream retirement and without it, Social Security benefits alone just won’t do that.

Here’s What You Need to Know and Understand Before You Retire

What is FRA – Full Retirement Age?

Most people tend to think that age 65 is the full retirement age. A law back in 1983 changed the FRA and raised it from 65 (since the inception of Social Security in the 1930s) to 66 for people born between 1943 and 1954. For those born in born in 1955, it is 66 and 2 months. FRA then inches up to 66 and 4 months for someone born in 1956, 66 and 6 months for a 1957 baby, and so on, until it settles at 67 for all people born in 1960 or later.

Social Security alone isn’t enough to live on comfortably in retirement

It’s a fantasy to believe that when you retire, Social Security benefits will pay you enough money to live a comfortable lifestyle, perhaps just like the one you were living while you were working. People cannot live comfortably on Social Security alone. On average, it will provide only about 30% to 40% of your pre-retirement income.

Nonetheless, Social Security benefits are still very valuable, so you’ll want to do whatever you can to maximize them. And there are things you can do to make that happen.

One of those things is obvious. The more you invest in a retirement plan such as a 401(k) or IRA, the more flexibility you’ll gain in managing your retirement costs, because you’ll have more sources of income to pair with Social Security when you actually retire.

Having multiple sources of income in retirement is very important. And the number one “extra” source of income is a retirement account that you have established for that purpose.

I urge you to start doing that when you are young, even at your very first job. If you haven’t yet done so, it’s never too late to begin. Every year you save and invest income, your money compounds geometrically and the longer it does, the more money you will have to supplement your Social Security check.

Do you know how your Social Security benefits are calculated?

Your benefits are based on your highest 35 years of earnings. That means if you work for 40 or 45 years, the best 35 of them is what Social Security uses when calculating your benefits. That’s a good thing because typically, your beginning years of work will be at lower wages then the ones you earn later on in your career.

The problem, however, may be that you didn’t work for a total of 35 years. If so, a “0” will be added for any year that falls short of the 35 used as the base. Are you worried that several years on a lower base or a “0” salary will negatively impact how much you receive in Social Security benefits?

Benefits are also based on your age when you begin taking them (you can begin as early as age 62). If you’re curious to know how much you’re projected to get as of right now, you can sign up for a my Social Security online account to see an estimate. You may be surprised by what you find.

The longer you wait to take Social Security, the more you’ll receive each month

Yes, you can claim your first benefits as early as age 62, but you will get a 25% reduced monthly benefit if you do. Waiting until your full retirement age (for most people now that age is 67, but it could be months sooner depending on the exact date of your birth) means you’re entitled to your full monthly benefit amount.

Even better, holding off until age 70 means you’ll get even more, a 32% increase of what your full monthly benefit would have been. On the face of it, why would you take a reduced benefit?

Unfortunately, your personal situation may force you to take less. Poor health is big factor or loss of job can also force such a decision. So claiming your benefits early isn’t always the best move, but you may not have a choice. Your needs must come first. You need to evaluate all your options.

Sometimes some benefits can be withheld and that may be good

If you claim your benefits before reaching full retirement age, you can still actually be working and make money. But if you exceed the yearly earnings limit of income allowed, you may have some of your Social Security benefits withheld.

The cap is $19,560 for 2022, and you would “lose” $1 in benefits for every $2 in earnings above the max. Still, getting your Social Security benefits at the reduced by 25% amount and then earning $19,560 in addition may be just fine for you, and then there’s more good news too.

You don’t really lose money when you do this. You won’t receive the money you had withheld while you are below full retirement age, but as soon as you reach full retirement age, Social Security will recalculate your benefits and give you credit for those dollars they deducted.

If you want to change your mind about taking Social Security benefits, can you?

If you decided to claim your benefits and then realized you should have waited, the Social Security Administration allows you to withdraw your application for a one-time do-over.

You may have changed your mind because you took a part-time job and no longer need the extra income, or you didn’t realize how much more money you could receive by waiting just a few more years.

If you make a determination within 12 months of filing an initial application, you can stop receiving benefits and move forward as if it never happened. However, you would have to pay back any benefits you received during that time period.

Did you know that your spouse’s Social Security benefits may affect you?

You can actually, under certain circumstances, claim your spouse’s or ex’s benefits, even if you’re no longer married. To qualify, your marriage must have lasted more than 10 years, you must be at least 62 and you can’t be remarried. You can also claim 100% of the survivors benefit if your ex-partner has died.

If your spouse dies, you also get to pick their benefit if it is greater than your own. If both spouses in a marriage are receiving Social Security benefits, the smaller benefit goes away when one person dies. It doesn’t matter who dies first, the surviving spouse will begin receiving the larger of the two benefits when it happens.

Do you have to pay income taxes on Social Security benefits?

This is very important. Yes, you may have to pay taxes on Social Security benefits. Many Americans do pay taxes on them. The exact amount you’ll need to pay depends on your total income. But it does not take a lot of income for your benefits to be taxed.

If you’re a single filer and earn between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If you earn more than $34,000, up to 85% of your benefits may be taxable.

For joint filers, if you and your spouse have a combined income that is between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. If your combined income is more than $44,000, up to 85% of your benefits may be taxable.

In addition to paying federal income tax on your benefits, there are 13 states that also levy income tax on Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. Of these 13 states, there are four that offer no exemptions whatsoever: Minnesota, North Dakota, Vermont, and West Virginia. Keep that in mind if you’re retiring in one of these states. So the bottom line is that you may have to consider where you will spend your retirement years to avoid these extra taxes.

Final Thoughts

Despite the negative vibes about Social Security benefits, they are not going away soon, if ever. They may change some, but they will still be around to help you in your retirement. The key word is help, not the one and only, be all, end all of retirement.

It’s important to think about Social Security even before you get close to retirement time so that when you are closing in on it, you are in a good position to deal with it. If not, it may be too late to change anything that can significantly help you.

Any income you can add to Social Security will ensure a better, more comfortable lifestyle for you. If you plan ahead now, you may reap those benefits and avoid the consequences. Are you knowledgeable and prepared and ready for retirement?

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