You may be someone who looks forward to the day you retire, or you could be someone who plans on working for as long as possible. No matter which category you fall into, you should do some retirement planning in preparation for this major milestone.
And if you're eligible for it, your Social Security payments could play a major role in how comfortably you live once you've stopped working. Getting the most out of this benefit will involve knowing these four things.
1. Your FRA
When you take your Social Security determines how much your monthly payment will be. If you take it at your full retirement age (FRA), you'll receive your standard benefit. That age is 66 if you were born between 1943 and 1954, 67 if you were born after 1967, and somewhere in between if you were born between 1955 and 1959.
You can take this benefit as early as age 62, but your benefit will be reduced for every year that you take it early. You can also delay it as late as age 70, and you'll get a pay increase for every year that you wait. For example, if your standard benefit is $2,200, your reduced payment at age 62 will be $1,650 and your increased payment at age 70 will be $2,900. The amount that you receive each month could determine how well you can pay all of your bills.
2. An estimate of your life expectancy
How long you'll live will always be a guess. But things like a family history of longevity and being in good health could give you a higher probability of living a long life. This matters in relation to when you take Social Security, because it could determine how much you draw from the system over your lifetime.
If you live to the age of 75, taking your benefit at age 62 will pay you $257,400. If you take it at age 66, you will get $237,600, and if you wait until age 70, you will get $174,000. If you live to the age of 80, you will get $356,000 if you take it at age 62, $369,000 if you take it at age 66, and $348,000 if you take it at age 70. If you live to the age of 85, you will get $455,400 if you take this benefit at age 62, $501,600 if you take it at age 66, and $522,000 if you wait until the age of 70.
The shorter you live, the more sense taking your benefit early makes, while the longer you live, the more you can get from the system if you delay it. And if you have an average life expectancy of around 80, taking it at your FRA could work out best for you.
3. How much you've saved (or will have saved)
Social Security is a guaranteed income source that you'll have in retirement. And if you're the average American, it could make up about 40% of your pre-retirement income. You might also be a lucky individual that has another guaranteed income source like a pension, and the more money you have coming in the less you need to be saved. But for many people, making up for the rest of this income depends on how much you save.
If your expenses in retirement will be $40,000 and your income is $20,000, you'll need an additional $20,000 each year if you plan on covering them. If your income sources add up to $30,000, you'll only need $10,000. Studies have shown that if you have a portfolio invested in 60% stocks and 40% bonds, your risk of running out of money in retirement is lowered if you keep your withdrawals at no more than 4% of your account value.
So with a $20,000 deficit between your income and expenses, you would need a beginning account balance of $500,000 to achieve this. But with a $10,000 deficit, you would only need $250,000.
4. Whether or not you'll still be working
Work part-time during retirement could count as one of your income sources and mean that your Social Security payments won't need to cover as many bills. So if you have $40,000 in expenses, get $20,000 in guaranteed income sources, and earn $10,000 from working, you'll only have a $10,000 gap, which could lower the amount of retirement savings that you need.
Whether or not you work in retirement also matters because if you work too much, it could affect your payments negatively. In 2021, if you are under your FRA, you will have $1 deducted from your monthly payment for every $2 that you make above $18,960. If you turn your FRA during 2021, you will have $1 deducted for every $3 that you earn above $50,520 up until the month before you get to your FRA. If you're thinking about taking Social Security early but the amount that gets deducted is significant, you may reconsider delaying it until your FRA when there are no penalties for working.
There is no universal right time that you must take Social Security. But there is an age that could be better for you than for others. And planning in advance for it and answering important questions that could either boost or lower your payment is crucial for making the best decision for you.