As someone who has spent over 26 years guiding clients through the complexities of financial planning in San Diego, I’ve heard a lot of misconceptions about Social Security. It’s no surprise—Social Security is a program that’s crucial for many people’s retirement, yet it’s often misunderstood. Today I want to address some of the most common myths I’ve encountered over the years, so you can feel more confident about your financial future. As always, my goal is to provide clarity, helping you make informed decisions that align with your financial goals.
Understanding the Basics
Before diving into the social security myths, let’s quickly run through what Social Security is and how it works. Social Security was established in 1935 as part of President Franklin D. Roosevelt’s New Deal. Its purpose is to provide financial assistance to retirees, disabled individuals, and survivors of deceased workers. The program is funded through payroll taxes, which means as long as people are working, money is being funneled into Social Security.
How Your Benefits Are Calculated
One of the first things I like to explain to my clients is how their Social Security benefits are calculated. It’s based on your lifetime earnings, specifically your highest 35 years of income. If you’ve worked less than 35 years, zeros will be factored into your average, which could lower your benefit amount. The Social Security Administration (SSA) uses a formula that adjusts your earnings for inflation, ensuring your benefits reflect the real value of your past earnings.
What It Takes to Qualify
To qualify for Social Security, you need to accumulate at least 40 work credits, which typically equates to about 10 years of work. You can earn up to four credits per year, depending on your income. Once you have those 40 credits, you’re eligible to receive retirement benefits starting at age 62. However, if you start claiming early, your monthly benefit will be reduced.
Myth #1: Social Security Will Run Out of Money
This is one of the most common concerns I hear from clients, and it’s understandable. We’ve all seen headlines warning that Social Security is going bankrupt. But let me assure you—while the program does face financial challenges, it’s not going to disappear.
The Truth: Social Security Isn’t Going Bankrupt
Social Security is funded by payroll taxes, so as long as people are working and earning an income, money will continue to flow into the program. It’s true that the ratio of workers to beneficiaries is shrinking, which means the program will need some adjustments in the future. However, even if no changes are made, Social Security will still be able to pay out about 75% of benefits after the trust fund reserves are expected to be depleted around 2034. So, while some tweaks might be necessary—like increasing taxes, raising the retirement age, or adjusting benefits—the program isn’t going away.
Myth #2: You Won’t Have to Pay Taxes on Your Social Security Benefits
This myth likely stems from the fact that Social Security benefits were originally exempt from federal income taxes when the program was first introduced. However, as with many things in life, this has changed.
The Truth: Some of Your Benefits May Be Taxable
Depending on your income level, you might have to pay federal income taxes on your Social Security benefits. If you have other sources of income—like wages, self-employment earnings, or investment returns—a portion of your Social Security benefits could be taxable. Specifically, if your combined income (which includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits) exceeds certain thresholds, up to 85% of your benefits might be subject to federal income tax. This is something we consider carefully when crafting retirement strategies for our clients.
Myth #3: Social Security Will Cover All Your Retirement Expenses
I’ve heard many people say, “I’m counting on Social Security to cover my retirement.” Unfortunately, this is a dangerous misconception that will set you up for financial hardship in your retirement years.
The Truth: Social Security Is Just One Piece of the Puzzle
Social Security was never designed to be your sole source of retirement income. It’s intended to replace about 40% of the average worker’s pre-retirement income. Today, on average, it represents about 30% of a retiree’s income. Most financial experts, including myself, recommend having at least 70% to 80% of your pre-retirement income to maintain your standard of living. This means you’ll need to supplement your Social Security with other savings, such as a 401(k), IRA, or other investments. At COPIA, we emphasize the importance of building a comprehensive retirement strategy that includes Social Security as one part of your overall retirement income plan.
Myth #4: It Doesn’t Matter When You Claim Social Security
Some people believe that the amount they’ll receive in Social Security benefits is the same no matter when they start claiming. This is a critical misunderstanding that can significantly impact your financial well-being in retirement.
The Truth: Timing Is Everything
The age at which you start claiming Social Security greatly affects the amount of your monthly benefit. You can begin receiving benefits as early as age 62, but your benefits will be reduced if you claim before your full retirement age (FRA) which is between 66 and 67, depending on your birth year. On the other hand, if you delay claiming benefits beyond your full retirement age, your monthly benefit will increase until you reach age 70. This increase can be as much as 8% per year, so choosing the right time to claim can have a substantial impact on your retirement income. This is why we often work with clients to determine the optimal time to start taking benefits, based on their unique financial situation.
Myth #5: You Can’t Work and Receive Social Security Benefits
There’s a belief that once you start receiving Social Security benefits, you can no longer work. This myth might deter some people from continuing part-time work during retirement, which can be a valuable way to stay active and supplement income.
The Truth: You Can Work, But Your Benefits May Be Affected
You are allowed to work while receiving Social Security benefits. However, if you haven’t reached your full retirement age and you earn more than the annual earnings limit, your benefits may be temporarily reduced. For 2024, the earnings limit is $22,320. If you exceed this amount, $1 will be deducted from your benefits for every $2 you earn above the threshold. Once you reach full retirement age, though, there’s no limit on how much you can earn, and your benefits won’t be reduced, even if you continue working. It’s important to consider this if you plan to work during retirement, and we help our clients navigate these decisions to maximize their financial outcomes.
Myth #6: Everyone Receives the Same Social Security Benefits
Another myth I frequently hear is that Social Security benefits are the same for everyone, regardless of their work history or earnings.
The Truth: Benefits Vary Based on Your Work and Earnings History
Social Security benefits are calculated based on your highest 35 years of earnings, adjusted for inflation. The more you earn during your career, the higher your benefits will be. Additionally, if you work longer, you may be able to increase your benefit amount, particularly if your earnings in later years are higher than in earlier years. This means that two people with different earnings histories will receive different benefit amounts. Understanding this variability is essential when mapping out your retirement income, and it’s something we take into account when advising our clients.
Myth #7: Once You Start Receiving Benefits, You’re Stuck
Many people think that once they start receiving Social Security benefits, they can’t make any changes or reverse their decision.
The Truth: You Have Options to Change Your Mind
If you claim Social Security benefits early and later realize that it wasn’t the best financial decision, there are options available. You can withdraw your application for benefits within 12 months of claiming and repay all the benefits you’ve received. This allows you to restart your benefits at a later date, potentially at a higher amount. Additionally, if you reach full retirement age and are still working, you can voluntarily suspend your benefits to earn delayed retirement credits, which will increase your benefit amount when you restart them. These options provide flexibility, but they require careful consideration and planning—something we’re here to help you navigate.
Empowering Your Financial Decisions
Social Security is a critical part of your retirement planning, but it’s just one piece of the puzzle. By understanding the truth behind these common myths, you can make more informed decisions that support your long-term financial wellbeing. At COPIA Wealth Management, we’re here to guide you every step of the way, ensuring that you’re not only well-informed but also empowered to take control of your financial future.
Feel free to reach out if you have any questions or need further guidance. Whether you’re just starting to think about your retirement or you need help fine-tuning your plan, we’re here to help. Schedule your complimentary consultation here or speak with our team at COPIA Wealth Management & Insurance Services by calling (619) 640-2622.
We’re committed to helping you achieve your financial goals with confidence.
