If you're counting on your Social Security benefits for retirement income, you should be aware that the benefit amount listed on your Social Security statement is not reliable. Not only is that number just an estimate, but there are certain expenses that will eat into whatever Social Security benefits you end up getting.
You see, the number on your Social Security statement is the administration's best guess at what your retirement benefits will be. However, this number is often way off-base -- especially if you're still years or decades away from retiring.
Your Social Security retirement benefits are based on your income during your 35 highest-earning years of work. Lacking a crystal ball, the Social Security Administration doesn't know how much you'll be earning in future years. So in order to come up with the number on your statement, it assumes you'll earn exactly the same income that you earned last year in every year to come.
If you manage to increase your average earnings in the years before you retire, then good news: Your Social Security benefits will likely be higher than your current Social Security statement indicates. However, if you have a few years in which your earnings decline -- or if you retire before you've accrued the full 35 years of earnings -- you could get an unpleasant surprise when you finally claim your Social Security benefits.
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Medicare premiums
Regardless of whether your future earnings change your benefit amount, your benefits will be subject to at least one deduction: your Medicare premiums. For most retirees, there's no premium required for Medicare Part A (the exception being retirees who paid less than 40 calendar quarters of Medicare taxes). If you qualified for Social Security benefits, you almost certainly don't have to worry about Part A premiums. However, you will need to pay premiums for Medicare Part B, and those premiums will be deducted automatically from your Social Security benefits.
The base Medicare Part B premium for 2017 is $134 per month. If your income exceeds a certain threshold -- $85,000 for single taxpayers or $170,000 for married couples filing jointly -- you'll have to pay a higher premium for Part B. At the highest income tier, the monthly Part B premium is currently $428.60.
High-income premiums apply to Medicare Part D (a.k.a. prescription drug coverage) as well. Premiums for Part D vary, but in 2017, you could pay as much as an extra $76.20 per month for coverage if you fall into the highest income tier. And like your Part B premiums, your Part D premiums will be automatically deducted from your Social Security benefits.