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Busting the top Social Security myths

Jan 17, 2012, 6 a.m.

When it comes to the issue of Social Security, it's critical to separate facts from myths so that you can gain a better understanding of how to plan your budget throughout retirement. Here's a handful of the most prevalent Social Security myths that are absolute bunk we hope you'll never buy into.

Myth #1: Taking benefits early is better than waiting until you're 65. The thought process behind this false notion is that you can start taking Social Security early and, even though it'll be for a significantly lower amount, you can still make it work in your favor by investing that money and having it pay off in spades further down the line. This is in fact one of the worst ideas, for several reasons. One of those reasons is that you're essentially taking a guaranteed figure and gambling it on the hope since by taking Social Security benefits early you'll be locking yourself in to a permanent reduction amount.

Myth #2: The money you paid into Social Security is locked safely away in a vault, earning interest. Wrong. Social Security facts tell us the exact opposite, that every dollar that's collected from working people for Social Security goes into the Treasury where it's used to pay the Social Security benefits of the presently retired.

Myth #3: Social Security payout isn't adjusted to meet the needs of inflation. This is one of the more confusing Social Security myths , primarily because not everyone understands how it works. In simple terms, there's a cost of living adjustment that happens every year (nicknamed COLA) that offsets the value of the dollar against the rising tide of inflation. This way, every dollar that you might have paid into Social Security a quarter century ago will still retain its value when the time comes for you to cash in on it.

Myth #4: If you continue to work past retirement age, you'll keep paying into Social Security but your benefits won't increase. The truth is quite a bit more comforting than that, and it makes a whole heck of a lot of sense, too. As long as you continue to work and to pay into Social Security, you'll continue to be given credit for it. In addition to that, the amount that you are owed will be recalculated with each passing year so that you're not hoodwinked out of what should rightfully be returned to you.

Myth #5: Social Security earnings aren't taxed. The truth of the matter is that currently, the highest earning Social Security recipients pay taxes on as much as 85 percent of their benefits. As the viability of Social Security continues to be called into question, it's entirely possible that this amount could be eventually raised to 100 percent, in which case the money that a retiree receives after tax will be substantially less.

This last particularly discomforting reality is one of the Social Security facts that underlines the importance of having a retirement plan in place to ensure you'll have enough money to fund the last few decades of your life. With people living much longer than ever before, it's quite possible that if you don't plan accordingly and make smart money decisions, you could run out of money when you hit your 90s. And what fun will your 90s be without an awful lot of spending cash on hand?

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