Social Security is a significant component of many individuals’ retirement plans, but it’s crucial to avoid overestimating its capabilities. This federal program provides monthly checks to help cover living expenses during retirement, but it was not designed to be the sole source of income. On average, Social Security replaces about 40% of pre-retirement income for workers.
Understanding the extent to which Social Security will cover your expenses is essential for planning your retirement budget. You can create a my Social Security account to estimate your benefit at various claiming ages and determine how much of your monthly expenses your checks will cover.
Another important factor to consider is that your Social Security benefits may be subject to federal and state taxes. The federal government taxes the benefits of individuals whose provisional income (adjusted gross income plus any nontaxable interest and half their annual Social Security benefit) exceeds specific thresholds based on marital status. These thresholds are $25,000 for single individuals and $32,000 for married couples.
Cost-of-living adjustments (COLAs) are also an essential aspect of Social Security benefits. These adjustments help benefits keep pace with inflation, but they may not increase as much as expected. The 3.2% COLA for 2024 boosted the average Social Security benefit by $59 per month, but future COLAs are expected to be smaller.
It’s essential to plan for these factors when budgeting for retirement and be prepared for potential changes to the program in the future to ensure its solvency for future generations. You can elect to have some of your benefits withheld for taxes if you prefer, but it’s important to plan for taxes in advance to avoid any surprises.
