- Taking early retirement will permanently reduce the amount of your Social Security checks.
- Your Social Security check may be subject to an offset to cover unpaid back taxes, student loans, or other liabilities.
- If your tax bracket goes up, you’ll have to pay more for Medicare, and that comes out of your Social Security check.
Social Security is a major source of income for 65 million Americans. However, when you receive your first Social Security check, you may find it is smaller than you expected. Alternatively, you may have been receiving a certain amount, only to find that your benefits have been reduced.
A variety of factors may cause your Social Security check to be decreased. Today we’ll talk about reasons your Social Security check may have been short this month.
Wondering when to expect your Social Security check? Check out our guide to the 2020 Social Security payments schedule.
You took early benefits
The year you were born determines your age of full retirement for collecting Social Security, but it is possible to begin collecting Social Security retirement income as early as 62. As with most things in life, there is a tradeoff: early retirement means you get your benefits sooner, but that also means you get a lower monthly payout and significantly less in total if you live beyond your life expectancy.
Some people retire early because they feel they need the money as soon as possible. However, the tradeoff is a costly one. For example, consider someone whose full retirement age is 67 but who opted to retire at 62. In that case, they would have their benefits reduced by 30% - permanently.
Take a moment to consider what this could mean in terms of the payout amount. If you were entitled to a Social Security check of $1,000 a month at full retirement age but you opted to retire at 62 and your benefits were cut by 30%, you would only get a Social Security check of $700 a month. If you imagine a scenario where you live to 90, without taking cost of living increases into account, taking the reduced check at age 62 would amount to $235,200 in total Social Security income, while waiting until full retirement age would net you $276,000.
This is one very good reason to talk to a Certified Financial Planner® to help you get a full picture of your financial health and your retirement options, and to check Social Security benefits. At the very least, it’s a good idea to know what your options are.
You were subject to an offset
Another reason you might find yourself collecting less than you expected to in Social Security benefits is being subject to an offset. An offset, simply put, is what happens when someone to whom you owe money collects it from your Social Security check.
A few common examples you might be subject to an offset include defaulted student loans, unpaid alimony or child support obligations, and back taxes. Another reason is if you retire early but continue working.
For Social Security Disability benefits, another factor that can affect payouts is Social Security Disability lawyer’s fees. Typically if the SSA approves your case, they will also approve your fee agreement and deduct lawyer’s fees accordingly. If you’ve been wondering when disability checks will be deposited, the SSA uses your birthday to determine your payment date.
If you’re wondering when your disability check will be deposited or how to track your disability back pay, the SSA has criteria for expediting disability payments. The site also provides services to help you track your benefits and your application status through a "my Social Security" account.
By law, the first $750 a month of your Social Security benefits are protected. This means that the Social Security Administration will offset your benefits by a certain amount every month until the debt has been repaid.
Your tax bracket changed
There’s another reason your benefits could be subject to an offset, and it has to do with Medicare. You are eligible to sign up for Medicare the year you turn 65. If you sign up for Medicare Part B, which covers medically necessary services and preventive services, your Medicare premiums will be deducted from Social Security payments.
Medicare can also have another consequence for Social Security offsets, and it has to do with tax brackets. If your tax bracket changes, the amount you need to pay for Medicare will also change. For example, if your income is above $87,000 but below $109,000 on an individual return, your monthly Medicare Part B premiums will be $202.40.
Now, if your tax bracket changes, you could end up paying more. For example, if your income is above $109,000 up to $136,000, you will pay $289.20. By the time you get to the $500,000+ bracket, it’s $491.60.
Simply put, if your tax bracket is higher your premiums will also be higher, and that will mean more will be taken out of your Social Security check. If your tax bracket goes down, you may appeal to the SSA for a lower premium.
Other factors affecting your Social Security check
In some cases, other factors may affect your Social Security check. Maybe you’ve retired, but your income went up instead of down. You might sell off a high-value asset, start a profitable business, or earn a great deal as a consultant or freelancer. Any of these things could boost your income into the next tax bracket, meaning higher Medicare premiums. If you are paying for a supplemental Medigap policy, your benefits could decline further.
There are a number of different circumstances that could contribute to your Social Security check being short, and some of them can have long-lasting repercussions for your retirement. It’s a good idea to talk to a Certified Financial Planner® before you retire, to see what your options are and how to make the most of them. You can also sign up for Retirable – we can help you to evaluate the tradeoffs of early vs. full retirement.