Social Security benefits supplement existing savings in retirement and while they’re valuable to many seniors, they’re often misunderstood. In a recent survey, only 28% of participants earned a passing grade when quizzed on their knowledge about Social Security. Here’s a look at the most common things seniors get wrong when it comes to Social Security.
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1. The Full Retirement Age Is 65
Many people assume that Social Security benefits kick in at age 65. In reality, your full retirement age depends on your birth year. As of 2016, 65 is the full retirement age for people born in 1937 or earlier. If you were born between 1943 and 1954, it creeps up to 66. For anyone born in 1960 or any year after that, it’s 67.
But you don’t have to wait until you reach your full retirement age to apply for Social Security. You can begin claiming benefits as early as age 62, regardless of when you were born. There’s a downside to doing that, however, because your payments will be reduced.
For example, someone born in 1960 or later who claims Social Security at age 62 would only get 70% of the monthly benefit amount they’re eligible for. That’s why delaying Social Security benefits can work in your favor.
2. You Can Wait to Apply for Medicare
While you can wait to begin claiming your Social Security benefits, you probably can’t afford to put your Medicare enrollment on hold. Medicare is designed to help cover healthcare expenses for seniors ages 65 and older. If you don’t apply for Medicare by the time you turn 65, you could get hit with a late enrollment penalty that would increase the size of your premiums.
3. Working Won’t Affect Your Benefit Amount
The Social Security Administration doesn’t frown on retirees who work while taking Social Security benefits. But if you retire before your full retirement age and you earn more than the maximum yearly earnings limit, your benefits will be reduced. The formula is a $1 reduction for every $2 you earn over the annual cap.
In the year you reach full retirement age, your benefits are reduced by $1 every time you earn $3 above the yearly limit in the months before your birthday. Beginning the month you hit your full retirement age, your benefits will no longer be affected by any income you’re earning from work.
4. Social Security Benefits Are Always Tax-Free
Some people don’t have to pay taxes on their Social Security benefits. But that’s not true for everyone. If you’re collecting benefits and working or you have substantial income from dividends or interest payments, you may have to pay taxes on part of your benefits.
As of 2016, seniors aren’t required to pay tax on more than 85% of their total benefit amount. Whether or not you’re required to pay taxes ultimately depends on your filing status and how much money you’re bringing in from outside sources.
Social Security can seem like a big mystery but it’s really not that complicated. By taking the time to familiarize yourself with the rules, you can avoid making mistakes once you’re ready to begin drawing benefits.
And if you need some guidance, don’t hesitate to reach out to a financial advisor. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
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