Millions of seniors collect Social Security and depend on those benefits to cover the bills in retirement. But there's a lot of misinformation circulating with regard to Social Security, and if you don't learn to recognize fact from fiction, you won't make the most of those benefits. With that in mind, here are three glaring myths it pays to get to the bottom of.
Reality: It's true that Social Security is facing a future shortfall that, if left unaddressed, could cause benefits to get slashed as much as 23% come 2034. But there's a big difference between that worst-case scenario and the program running out of money completely, and buying into the latter might cause you to act hastily with regard to your benefits.
The fact of the matter is that Social Security can never truly go broke because its funding comes from payroll taxes. Therefore, as long as we have a workforce and continue to collect those taxes, it will remain standing. Furthermore, Congress has a good 16 years to step in, address the aforementioned shortfall, and prevent benefits from getting slashed. Therefore, if you're thinking of filing for Social Security as early as possible to ensure that you get some of that money while it's still available, don't do it. Filing early will slash your benefits, and that's a good way to ensure a lower income stream for the remainder of your golden years.
Reality: Social Security is technically designed to pay you the same amount in lifetime benefits whether you file at the earliest possible age of 62, the latest age of 70, or somewhere in the middle. The logic is that any reduction you receive in your monthly payments by filing early will be offset by the greater number of individual payments you collect. Similarly, holding off on benefits will boost your payments, but you'll collect fewer individual payments as a result.
This formula, however, assumes that you live an average life expectancy, so if you have reason to believe you won't live a very long life, you're actually better off filing as early as possible. On the flipside, if your health is great and you have a strong family history of longevity, you'll generally come out ahead financially by waiting as long as possible to file.
Here's an example. Imagine you're looking at a full retirement age of 67, at which point you'd collect $1,500 a month. Claiming benefits at 62 will reduce your monthly payments to $1,050 each, but you'll collect 60 more of them. If you live until age 78 1/2, you'll wind up with roughly the same total lifetime benefit under either scenario. But if you pass away at 75, you'll come out nearly $20,000 ahead by filing early.
Similarly, if you delay benefits until 70, you'll increase each individual payment you get from $1,500 to $1,860. If you live until 82 1/2, you'll break even under either filing scenario. But if you live until 90, you'll come out over $32,000 ahead by taking benefits at 70 rather than 67. The point is that it does matter when you file for benefits, so think long and hard about the state of your health and use that to help guide your decision.
Reality: Since 1975, Social Security recipients have been getting automatic annual cost-of-living adjustments, or COLAs, to help their benefits keep pace with inflation. Therefore, you might think you can rest easy knowing that the amount you start out collecting will slowly but surely go up over time.
The problem, however, is that COLAs in recent years have failed to match the rate of inflation, thereby putting seniors at an automatic disadvantage. Furthermore, most COLAs get swallowed by Medicare premiums as a result of Social Security's "hold harmless" provision, which means seniors frequently see little to no extra money in their hands once those COLAs are put into place.
The "hold harmless" provision states that Social Security recipients can't see their benefits go down due to Medicare premium increases, and while it's designed to protect seniors, it also means that they typically don't benefit from COLAs in the form of disposable, accessible income. Therefore, if you want a shot at retaining your buying power in retirement, invest your savings wisely so that your IRA or 401(k) returns are able to well outpace inflation and compensate for Social Security's flawed COLAs.
The more you know about Social Security, the greater your chances of maximizing your benefits. So do yourself a favor and read up on how the program works. This way, you'll be in a better position to separate myth from reality going forward.
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