Taxes, timelines, and other myths about Social Security

Getting to the bottom of 7 common misconceptions

As of June 2023, the average Social Security check totaled $1,701.62. Most people who collected – roughly 55% – were 66. The maximum amount they could collect was $3,506.^{1, 2}

The difference, of course, can be attributed to the wide range of earnings. But some of it may also be the result of timing, circumstances, and confusion about changing rules.

We want to ensure you collect the maximum amount of your benefit, based on your history of employment and post-retirement goals. If you’re unsure of the most advantageous time to begin collecting Social Security and how it will fit into your financial journey, read on. We’re clearing up some of the most widespread misconceptions that our wealth management team is asked.

7 common Social Security myths, from our clients

Social Security is an insurance program that provides benefits to retired people and those who are disabled or unemployed. These following myths apply to retirees, who are eligible for full Social Security benefits at age 67, and qualifying non-retirees.³

Myth 1: Social Security is going broke.

Securing the facts: All in, the Social Security Administration makes monthly payouts just north of $113 billion, which is less than the amount of income feeding into it. However, the deficit at its current rate will not affect what Americans can collect until 2034. At that time, if Congress takes no action to shore up Social Security, benefits will decline by 20% – meaning 80% of a person’s benefit will still be covered. But until 2034, retirees can expect full coverage. (Note: If Congress does make changes, they won’t affect those already collecting benefits.)^{4, 5, 6}

Myth 2: My payout is based on what I made in the last five or 10 years.

Securing the facts: Social Security is calculated based on the highest 35 years of earnings. For those worried that their income 35 years ago was very small, take comfort in knowing the Social Security Administration adjusts for inflation. Also, those 35 years do not have to be consecutive – if you worked for 40 years, the lowest-earning five years will be screened out, whenever they occurred. However, you do need to have paid into Social Security for at least 10 years to be eligible for benefits.^{7, 8}

Myth 3: I don’t have to pay taxes on my Social Security benefit.

Securing the facts: Social Security recipients pay taxes on 50% to 85% of their benefits, depending on their total gross annual income (starting at $25,000 for individuals). For a point of reference: if you make $25,000 to $34,000 in total income as an individual, or $32,000 to $44,000 as a couple, you will owe taxes on 50% of your benefit. If you earn more, you’ll be taxed up to 85%. Income sources can include a pension, investments, earned interest, and real estate sales.^{9, 10, 11} So taxes can vary year to year, just as they did when working.

Myth 4: If I start collecting Social Security, I have to stop working.

Securing the facts: Regardless of your employment position, you can start collecting Social Security as early as age 62. However, if you work and start collecting benefits before reaching the full retirement age of 67, the Social Security Administration will deduct $1 in benefits for every $2 you earn above an annual limit, which in 2023 is $21,240.¹² Once you reach retirement age, you can collect your full Social Security benefit, regardless of income or employment status.

Myth 5: I am required to collect Social Security once I retire.

Securing the facts: No one is required to collect Social Security benefits before reaching age 70, even if retired. If you retire at 62 and want to collect at 64, you can do that, too, but your payout would be reduced by about 0.5% for each month until the full retirement age of 67 – 6% a year. Meanwhile, those who delay collecting Social Security benefits beyond 67 will receive an increased benefit, which is automatically added every month until they start collecting.^{13, 14}

Myth 6: There is a guaranteed cost-of-living increase in Social Security.

Securing the facts: While the Social Security Administration has, since 1975, increased benefits annually based on its cost-of-living adjustment (COLA), that bump is not guaranteed. There were three years – 2010, 2011, and 2016 – when no adjustments were made. In 2023, the administration elevated the benefit by 8.7% – the highest gain since 1981, and the fourth-highest on record. In 2024, analysts forecast a COLA of around 3%.^{15, 16, 17}

Myth 7: My ex-spouse will diminish my benefit.

Securing the facts: While ex-spouses who have been married for 10 years can collect on each other’s Social Security benefits, it does not reduce the amount of money to which the benefit owner is entitled. In fact, an ex-spouse can collect a benefit without you even knowing. The payout depends on when the ex-spouse collects and his or her own benefit amount, but typically they can collect up to half of your full benefit, assuming it is greater than theirs. For example, if an ex-spouse’s monthly payout is $1,000 and yours is $3,000, the ex is entitled to $1,500 – a $500 bump.^{18, 19, 20}

Personal advice on your Social Security plan

If you plan to incorporate your Social Security benefit into your broader financial portfolio, keep these facts in mind, knowing that your financial journey might change. A wealth advisor can help you construct a plan with flexibility and a focus on quality.

If you haven’t checked your benefit payout estimates recently, you can do so on the Social Security Administration’s website.

Our wealth management professionals at Yellow Cardinal Advisory Group have decades of experience counseling clients on their Social Security benefits and how to build them into long-term, comprehensive life plans. If you’d liked to meet an advisor near you, you can get started right here.