The Typical Social Security Benefit Is $2,088, but You Might Not Take Home the Full Amount

Many older Americans are living entirely on Social Security. That can be tough, but with careful budgeting and very modest spending, it may be possible.

The average monthly retirement benefit is about $2,088, or roughly $25,000 a year. If your mortgage and car are paid off and your expenses are very low, your benefits may cover your costs. Still, you should not assume you will keep every dollar of that check.

There are several reasons your Social Security payments may not arrive in full, and it is worth understanding which ones could affect you.

If you keep working, part of your benefit may be held back

The Social Security Administration allows people to work while collecting monthly benefits. Once you reach full retirement age, you can earn any amount from a job without having Social Security withheld.

Before that age, however, the earnings test applies. If you make too much money, some of your Social Security can be temporarily withheld, and in some cases your check could be reduced substantially.

Under the current rules, beneficiaries who have not reached full retirement age by the end of the year can have $1 withheld for every $2 earned above $24,480. If you reach full retirement age by the end of the year, the withholding becomes $1 for every $3 earned above $65,160.

The money withheld because of the earnings test is not permanently lost. When you reach full retirement age, the Social Security Administration recalculates your benefit and restores that withheld amount in the form of larger checks. Even so, you may not receive the full amount right away.

Higher income could make part of your benefits taxable

Most people pay into Social Security through payroll taxes, so it might seem like benefits should be tax-free in retirement. But once your provisional income reaches certain levels, part of your Social Security can be taxed.

Provisional income includes adjusted gross income, tax-exempt interest, and 50% of your annual Social Security benefit. If that total falls between $25,000 and $34,000 for a single filer, or between $32,000 and $44,000 for a married couple filing jointly, as much as 50% of your benefits may be taxed at the federal level. Above those ranges, up to 85% of your benefits could be taxed.

Those thresholds are not especially high because they were set decades ago and have not been adjusted for inflation. They remain in place in part because taxes on benefits help fund Social Security, which needs revenue to stay supported.

Medicare Part B premiums can also reduce what you receive

If you are enrolled in both Medicare and Social Security, you must pay for Part B, which covers outpatient care and diagnostic services, through deductions from your monthly benefit. That means you should not expect to keep your Social Security check in full once Medicare begins.

The standard monthly Part B premium changes from year to year. It is currently $202.90, and higher-income beneficiaries who face surcharges pay more.

Multiple deductions can hit at once

Some retirees receive far more than the average Social Security benefit, but the amount you qualify for still may not be the amount you actually keep. In some cases, several reductions can hit at the same time and cut a check down significantly.

For example, if you are working at age 65 while receiving benefits, you have not yet reached full retirement age and may be subject to the earnings test. If your income is high enough, your benefits could also be taxed because of your provisional income. And if you are on Medicare, Part B premiums may be deducted as well.

That is why it is important to know what can reduce your Social Security payment. Understanding those rules can help you avoid an unpleasant surprise.

The bottom line

Social Security can be a major part of retirement income, but it may not be yours to keep in full. Working before reaching full retirement age, owing taxes on benefits, enrolling in Medicare, or dealing with all three can reduce what ends up in your pocket.

That is why a complete retirement income plan matters. Whether you build that plan yourself or with a financial advisor, you need a realistic picture of your spending needs and how much Social Security will actually provide after all deductions. From there, you can estimate how much extra income you will need to support long-term financial security.