Social Security is the backbone of retirement income for millions of Americans. But relying too heavily on it or misunderstanding how it works can lead to costly mistakes. Baby boomers often miscalculate what Social Security will provide and how it fits into their overall retirement strategy.
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GOBankingRates spoke to Chad Gammon, a financial advisor and founder of Custom Fit Financial, who shared what boomers get wrong about Social Security and what millennials can learn from them.
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Believing Social Security Will Cover All Expenses
One of the biggest misconceptions is that Social Security will pay for everything in retirement.
“Social Security was never intended to replace a paycheck but to provide a base layer of income. Millennials should look to build savings in 401(k) plans, IRAs, or brokerage accounts,” said Gammon.
Relying solely on Social Security could leave you struggling to make ends meet. That’s why both boomers and millennials need to diversify their savings and ensure they’re building additional sources of income.
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Overlooking Taxes on Benefits
Another thing boomers get wrong is the taxation of Social Security benefits.
“This came up in the last election where a lot of Social Security recipients are taxed up to 85% on their benefits,” Gammon explained. “The settings for this taxation were set in the 1980s and haven’t been adjusted for inflation. So each year more and more recipients are going to get taxed this way.”
For millennials, this means it’s smart to prepare for the likelihood of taxation. Contributing to Roth accounts or building taxable investment portfolios can help reduce the impact of taxes in retirement.
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Thinking Social Security Will Disappear Completely
A common worry is that Social Security will run out of money and disappear. While the program does face funding challenges, it won’t go away entirely.
“Social Security will not go bankrupt but may need cuts unless changes are made in the next five to seven years,” according to Gammon. “These cuts might reduce benefits by 20%, but there are ways that Congress can adjust and fix the issue. They just won’t do that until the last minute.”
Millennials should plan conservatively by assuming slightly reduced benefits. Building a retirement plan that accounts for potential cuts now provides a buffer against future uncertainty.
Claiming Benefits Too Early
One of the most costly mistakes is claiming Social Security as soon as you’re eligible. While it may feel tempting to start receiving checks right away, doing so comes with trade-offs.
“Taking Social Security at the earliest age reduces your benefits by roughly 30%. And then delaying all the way to 70 years old can help out tremendously. With longevity increasing, this benefit could help millennials out by delaying as long as possible,” Gammon noted.
Patience can pay off. Waiting until full retirement age or even longer can significantly boost lifetime benefits.
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This article originally appeared on GOBankingRates.com: I’m a Millennial Retirement Advisor: Here’s What Baby Boomers Get Wrong About Social Security