Most people understand the basics of Social Security: You pay money into the program throughout your career and then get monthly checks in retirement to help you cover living costs. It's the finer points that often trip people up.
Here are three important Social Security principles that all workers and seniors should be aware of, whether they're already retired or decades away from claiming.
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1. It won't cover everything
Though many seniors live almost exclusively off Social Security , the program wasn't intended to be your sole source of retirement income. It was only designed to replace about 40% of pre-retirement income for average workers. Those with lower incomes may get slightly more than 40%, while those with higher incomes will probably get less.
Alternative sources of retirement income are critical if you hope to maintain your financial security. Personal savings are great, but you could also work part-time in retirement to have access to a steady paycheck. Some seniors may also qualify for additional government benefits to help them with essential costs, like food and healthcare.
Understanding how far your Social Security checks will go in retirement is crucial to determining how much of your future expenses you'll need to cover on your own. The 40% rule above is a good benchmark, but if you want a personalized estimate, create a my Social Security account .
There's a tool there that can help you estimate your benefit at all future claiming ages. Once you know when you plan to sign up, you can use this information to estimate how much of your monthly expenses your checks will cover.
2. Your benefits may not all belong to you
The federal government taxes the Social Security benefits of individuals whose provisional incomes -- adjusted gross income (AGI) plus any nontaxable interest and half their annual Social Security benefit -- exceed the following thresholds for their marital status:
Marital Status | 0% of Your Benefit Is Taxable If Provisional Income Is Under: | Up to 50% of Your Benefit Is Taxable If Provisional Income Is Between: | Up to 85% of Your Benefit Is Taxable If Provisional Income Exceeds: |
|---|
Single | $25,000 | $25,000 and $34,000 | $34,000 |
Married | $32,000 | $32,000 and $44,000 | $44,000 |
Source: Social Security Administration.
You'll pay ordinary income taxes on the taxable portion of your Social Security benefits, so it's not as though you'll actually lose 50% or 85% of your checks. But it can still take a significant bite out of your benefit, and that can be devastating for seniors who aren't prepared.
Some states tax Social Security benefits as well. However, each has its own rules about who owes these taxes. Generally, only residents with high annual incomes have to pay state benefit taxes.
Sometimes, it's possible to avoid these taxes by reducing spending as you near the taxation thresholds or relying upon Roth savings, which don't increase your tax liability. But when this doesn't work, seniors need to plan for the taxes in advance so they don't receive a surprise bill.
You can elect to have some of your benefits withheld from your checks for taxes if you'd rather not do the math yourself. Contact the Social Security Administration to learn how to do this.
3. Cost-of-living adjustments (COLAs) might not be what you expect
Seniors on Social Security receive cost-of-living adjustments (COLAs) most years. These adjustments help Social Security benefits keep pace with inflation but may not boost your checks as much as you'd think. The 3.2% COLA for 2024 boosted the average Social Security benefit by $59 per month, but this was an above-average increase.
The latest forecast from the Congressional Budget Office (CBO) shows that COLAs over the coming years will likely be even smaller. Some retirees argue that this, along with high inflation, is forcing them to shoulder more of their retirement expenses on their own. This highlights the need for other sources of retirement income besides Social Security.
It's important to keep these things in mind when planning your retirement budget, but also remember that the government will likely make changes to the program in the next few years to keep it solvent for generations to come. When this happens, you may need to adapt your retirement budget to accommodate these changes.
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