The Top Five Social Security Myths

by Andy Landis, Thinking Retirement
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A lack of information can cause bad retirement decisions.  Even worse is wrong information.  Let’s get a reality check on the top five Social Security myths—or “myth-information,” if you will.

Myth 1:  Social Security payments are based on your last 10 years of work (or 5, or 15, …).  False.  Your Social Security retirement payments are based on your lifetime average earnings.  SSA uses your best 35 years of work, indexed for inflation.  (Fewer years are used for mid-career death or disability.)

“Myth-understanding” the 35-year average can cause a wrong turn.  For example, meet Janet.  She was born in 1950 and had very high lifetime earnings.  Janet longed to retire at 57.  But she thought that Social Security was based on the last 10 years, so she worked 5 more years at maximum earnings to avoid a big Social Security cut.  At 62, she learned that the extra years of work yielded exactly $52 per month.  Sure, it’s more, but if Janet had known that number at age 57, would she have kept working for 5 more years?

To avoid an “oops,” get a Social Security estimate.  Sign up to get estimates anytime.  Then tailor the estimate to any retirement scenario you’re considering (like early or partial retirement), using SSA’s online Estimator.

Myth 2: You should postpone Social Security to get the most retirement income.  Maybe so, maybe no.  You already know that taking your retirement payments later, up to age 70, gives you a higher monthly payment.  But will you survive long enough to reap the benefit?  Will you drain your savings while waiting for Social Security to start, short-changing your later years?  If you withdraw from tax-deferred retirement accounts, will you pay more in taxes than you would if you drew Social Security instead?

These and more considerations need to be taken into account.  In some cases, you’re money ahead by taking the Social Security earlier, not later.  Run your numbers at my favorite free online estimator, or better yet, work with a fee-only financial planner.

Myth 3:  You have to die for your family to get Social Security on your work record.  False.  Your spouse and children (and yes, your former spouse) can be eligible for Social Security—even while you’re alive.  Make sure to take family benefits into account in your retirement planning.

For example, a colleague recently retired at 62 with two young adopted children.  Turns out the kids were eligible for Social Security as soon as she enrolled, up until they are out of high school.  Taking Social Security for herself and the kids at 62 put her money ahead until age 95, compared to waiting for a “higher” payment at age 66 or 70.  These were powerful “found” dollars for her retirement.

By the way, it is true that your family can get Social Security if you die.  Just don’t wait that long!

Myth 4: You can’t work and get Social Security at the same time.  False.  It’s true that there’s a threshold earnings level; it’s $15,720 in 2016.  What’s false is that if you earn anything over the threshold, your Social Security stops.

First, the threshold applies only to those under Full Retirement Age (FRA, currently 66).  Once you are over FRA, you can work all you want and still get full Social Security.

And even while you’re under FRA, the threshold isn’t a brick wall.  For every $2 you earn over the limit, your Social Security is reduced $1.  Note that whatever your work level, you come out money ahead, even after the Social Security reduction. You’d have to earn quite a bit—perhaps $30,000 to $50,000—to lose all your Social Security.

Finally, remember that only work income—wages or self-employment earnings—count against your Social Security.  Pension, interest, dividends, capital gains, etc. don’t count.

So go ahead and make work part of your retirement plan.  Just learn the details first.

Myth 5:  Social Security is about to go broke.  False.  Social Security is still running a surplus and invests the extra money they bring in each year, so their reserve funds are growing.

Yes, there are plenty of articles claiming otherwise.  But look closely.  They’ll say that Social Security payments exceed payroll tax revenues.  That’s true.  But that ignores Social Security’s investment income: interest on their huge bond portfolio.  Counting all income reveals that SSA is running a surplus ($23 billion in 2015), with surpluses continuing until 2020.

What happens after 2020?  SSA’s reserves provide full payments until 2034.  After that, tax revenue alone will provide about 79% of needed funds.

Yes, Congress will have to increase revenue and/or cut benefits before then to close the gap.  I’m cautiously optimistic that they will, for two reasons.  Social Security is extremely popular politically, and it’s the cheapest way to provide financial security for a large population.

The bottom line is that you’ll make better retirement decisions with accurate information.  Best wishes for an abundant retirement, and as always, keep on planning.