Throughout the month of May, we will be talking about Social Security, and debunking a few common myths about what its purpose is and how it works.
The best place to start is by defining what Social Security actually is. Social Security is a federal program that supplies benefits to those retired and/or disabled. The program is financed via Social Security taxes so that the current working population pays for the current retired population. Typically, you have to work for 10 years to be eligible for retirement benefits. Your benefit in retirement is based on your average earnings in your working years.
You can begin drawing Social Security at age 62. However, your benefits will be reduced if you begin taking payments before full retirement age. Conversely, if you delay receiving payments after full retirement age up to age 70, it can increase your benefits.
Social Security Myth #1: You will receive most of the income you need in retirement from Social Security
Fact: Social Security will supply some income, but it will most likely be less than what is necessary. At its roots, Social Security was never intended to be the only source of income for retirees. It is important to save as much as possible for retirement so that you do not have to rely solely on Social Security.
Social Security Myth #2: The income you receive from Social Security is not taxable.
Fact: If you have some earned income outside of Social Security, the income and some of your benefits may be taxable. In addition to the tax consequences, the earned income can affect the amount of your Social Security benefits if you are under full retirement age.
Social Security Myth #3: Social Security only provides income for retirement.
Fact: While income for retirees is a large part of Social Security, the program also provides benefits for those with disabilities and survivors of previous recipients. For those receiving benefits, it is important to consider if your family members would be eligible to receive your Social Security benefits if you passed.
Social Security Myth #4: Social Security is going away.
Fact: Social Security is facing some difficulties, but it is not going away any time soon. Current Social Security benefits are supported via Social Security taxes paid by the working population. However, the demographics in the U.S. are shifting as there are more retirees than people working, causing the program to pay out more than it is bringing in. In the future, Congress is going to have to make some adjustments but has never indicated that they intend to get rid of the program.
When planning for retirement, it is important to diversify your income streams and not solely rely on any one in particular.
Source: Social Security Administration, Social Security Basic Facts, 2021
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