3 Social Security Beliefs That Can Hurt Retirees Financially — and the Facts Behind Them

Knowing how Social Security fits into a retirement plan can help make retirement more secure. But mistaken assumptions about the program can lead to costly decisions.

Relying on bad information when deciding when and how to claim benefits can leave retirees exposed and overconfident. Here are several common myths that can create serious financial strain.

Myth #1: You should claim benefits as soon as possible

One common misconception is that Social Security should always be claimed at the earliest opportunity in case the program runs short. In reality, filing early means accepting a reduced monthly benefit. The longer you delay, the larger your monthly payment can become.

Claiming at 62 could provide up to $2,969 per month, while waiting until 70 could increase that amount to as much as $5,181 per month. For some retirees, working a few extra years or using savings from a 401(k), IRA or other investment accounts to cover the gap before claiming can make a meaningful difference.

Myth #2: Social Security benefits are not taxable

Another myth is that Social Security checks are always tax-free. In fact, as much as 85% of benefits can be counted as taxable income.

How much is taxable depends on filing status and combined income for the year. That combined income is calculated using a formula that includes adjusted gross income, tax-exempt interest and half of Social Security benefits.

At the federal level, benefits are not taxable if income, including Social Security, stays below $25,000 a year for individuals or $32,000 for married couples filing jointly. If income falls between $25,000 and $34,000 for individuals, or between $32,000 and $44,000 for married couples, up to 50% of benefits may be taxable. Above those levels, as much as 85% can be taxed. Some states also tax Social Security.

Retirees should also remember that withdrawals from traditional retirement accounts increase ordinary income and can raise a tax bill. For that reason, some people draw down retirement savings before claiming Social Security in an effort to reduce total taxes.

Myth #3: Social Security will cover all retirement expenses

The last myth is that Social Security alone will be enough to pay for retirement living costs. It should be viewed as only one part of a broader retirement strategy.

Building a larger nest egg can help fill the gap. A common guideline is to save at least 15% of pretax income each year for retirement. It also helps to take full advantage of any employer 401(k) match and to make catch-up contributions once you reach age 50.

Some retirees later return to work after discovering that Social Security does not cover everything. Sticking to a detailed budget can help control spending and free up more money to invest. Keeping close watch on finances can also help avoid two major mistakes: saving too little and spending too much.