Avoiding Common Errors in Your Estimates

Even with access to accurate calculators, many pre-retirees make critical assumptions that throw their retirement budgets off balance. Avoid these frequent missteps when building your financial plan.

Forgetting the Tax Impact: A common misconception is that Social Security benefits are entirely tax-free. Depending on your total income, up to 85% of your benefits may be subject to federal income tax. The Internal Revenue Service (IRS) uses a metric called “provisional income” to determine your tax liability. You calculate this by adding your Adjusted Gross Income, any non-taxable interest, and half of your Social Security benefits. If this combined total exceeds $34,000 for an individual or $44,000 for a married couple filing jointly, you will owe federal taxes on up to 85% of your Social Security income. Always build your budget around your after-tax benefit estimate.

Ignoring the Earnings Test: If you claim Social Security before your Full Retirement Age and continue to work, you run into the retirement earnings test. If your earned income exceeds the annual limit set by the SSA, they will withhold $1 in benefits for every $2 you earn above the threshold. While you eventually get this money back in the form of a recalculated benefit once you reach FRA, the immediate withholding can devastate a tight monthly budget. If you plan to work part-time in your early sixties, factor this limit into your income projections.

Overlooking Medicare Part B Premiums: When looking at your Social Security retirement income estimate, remember that it represents a gross figure. Once you enroll in Medicare at age 65, the government automatically deducts your Medicare Part B monthly premium directly from your Social Security check. Furthermore, if you had a high income during your working years, you may be subject to the Income-Related Monthly Adjustment Amount (IRMAA), which significantly increases that premium deduction. When estimating your spendable cash, manually subtract the current Medicare Part B premium from your total.