Social Security is a system that you pay into while you are working. Once you qualify for it, you can take this benefit when you stop. And it could be a very important source of income for you in retirement.
There are ways that you can make the most of it, which could help make your retirement a breeze. But there are also actions you could take that could lead to the exact opposite and cost you big.
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1. Depending on just Social Security in retirement
The percentage varies based on how much you made while you were working, but for the average person, Social Security will make up about 40% of your pre-retirement income. That means that if you made $75,000 while working, your Social Security payments could add up to about $30,000 annually.
If you've done a great job of reducing your expenses, this could be enough for you. But if not, you may find yourself living on a very strict fixed income in retirement. Your essential bills may get paid, in the beginning, but as inflation makes the products and services you buy more expensive, paying for them might get harder. And there won't be much room in your budget for unexpected expenses either.
Having another income stream or emergency fund can help you alleviate this problem. For some, this could be another guaranteed source like a pension. But for many, you will spend your career socking away money into a retirement account like a 401(k) that you will eventually draw from in retirement.
The earlier you start saving for this milestone, the more stock market appreciation and compound interest will help your investment grow. And this means that you can potentially contribute less each year than if you did not invest your money. The table below shows how investing your money can help it grow over 30 years.
| $5,000 annually | $7,500 annually | $10,000 annually | |
|---|---|---|---|
| 8% | $611,729 |
$917,594 | $1,223,459 |
| 9% | $742,876 |
$1,114,314 | $1,485,752 |
| 10% | $904,717 | $1,357,076 | $1,809,434 |
Calculations by author.
2. Taking your benefits at the wrong time
There isn't necessarily a wrong time that you can take Social Security, but there could be a best time for you. And that timing depends mostly on your life expectancy. There is no way of knowing exactly how long you will live, but there are certain things like a family history of longevity or being in good health that could increase your odds of living a long life in retirement.
If you qualify for Social Security, you will get your standard benefit at your full retirement age (FRA). But you can take it as early as age 62 and as late as age 70. For every year that you take it early, though, your benefit will be reduced, and for every year that you take it later, it will be increased. The shorter your life expectancy, the more sense taking this benefit early at age 62 makes. But if you live to the age of about 80, taking it at your FRA may be best. And the longer you live, the better delaying it could work out for you.
If your FRA is age 66 and you're eligible for a $2,500 benefit at that time, your reduced benefit at age 62 will be $1,875 and your delayed benefit at age 70 will be $3,300. The table below illustrates how much you can draw from Social Security over your lifetime depending on when you start taking it and how long you live.
| Live to 75 | Live to 80 | Live to 85 | |
|---|---|---|---|
| Take at 62 | $292,500 | $405,000 | $517,500 |
| Take at 66 | $270,000 | $420,000 | $570,000 |
| Take at 70 | $198,000 | $396,000 | $594,000 |
Calculations by author.
Social Security could make up a significant portion of your income when you retire. But it alone probably won't provide you with the type of retirement that you've always dreamt of. Learning what age you should take this benefit will help you maximize this income stream. And planning for how you can best supplement it with your savings can help you avoid depending on it as your sole source of income.
