3 Social Security surprises that could cost you in retirement

For millions of older adults, Social Security is a lifeline in retirement. But sometimes even small misunderstandings can be costly.

While you don't need to know every detail about how the program works, knowing at least the basics of how your benefits are calculated can help you avoid any surprises in retirement.

These three factors are some of the most commonly misunderstood aspects of Social Security, and knowing how they'll affect your monthly payments can make it easier to maximize your retirement income.

1. Your benefits could be subject to state and federal taxes

Even in retirement, you can't escape income taxes. Your Social Security checks may be subject to both state and federal taxes, but exactly how much you'll pay (or whether you'll owe taxes at all) will depend on a few factors.

State taxes will depend on where you live, and the good news is that the majority of states don't tax Social Security. Even among those that do, there are often exemptions based on age or income. Because each state has different regulations, it's best to check your state's tax code to see whether you'll owe taxes on your benefits.

Federal taxes affect everyone, and they will depend on a figure called your "provisional income" – which is half of your annual Social Security benefit plus your adjusted gross income (such as 401(k) withdrawals) and any nontaxable interest.

Source: Social Security Administration.

The only way to get out of paying federal taxes is if your provisional income falls below $25,000 per year (or $32,000 per year for married couples). But regardless of how much you're earning, you won't pay federal taxes on more than 85% of your benefit amount.

2. Your benefit won't increase once you reach your full retirement age

The age you file for Social Security will have an enormous impact on your benefit amount. If you file before your full retirement age (FRA), your monthly payments will be slashed by up to 30%.

However, many people mistakenly believe that if they file early, their benefit amount will automatically increase once they reach their FRA. In fact, roughly half of U.S. adults believe this to be true, according to a 2023 survey from the Nationwide Retirement Institute.

In reality, your benefit amount is generally locked in for life once you begin claiming. It's especially important, then, to think carefully about the age you file. While filing early isn't necessarily a bad idea, you will receive smaller checks for the rest of your life.

3. The length of your career affects your benefit amount

Another commonly misunderstood factor is how your career affects your monthly payments. More than 60% of U.S. adults are unaware that working for fewer than 35 years will result in reduced payments each month, according to the Nationwide survey.

The Social Security Administration calculates your benefit amount by taking an average of your wages throughout the 35 highest-earning years of your career. That number is then run through a complex formula to account for cost-of-living changes, and the result is the amount you'll receive by filing at your FRA.

If you haven't worked 35 full years before you begin claiming, you'll have zeros added to your earnings average to account for the time you weren't working. That will bring down your average, resulting in a smaller benefit amount.

Social Security can be complicated and confusing, and it can be difficult to understand all the factors affecting your benefits. But having at least a basic understanding of how the program works can make it easier to prepare for retirement.

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