You pay into Social Security your entire working career with the hope that it will cover your retirement expenses when you stop working. This guaranteed income source could be a major lifeline for you, and if you're like the average person, it will replace about 40% of your working income.
But that probably won't be not be enough, so there are things you can do before starting benefits that will help you make the most of the program. Here are three of them.
Image source: Getty Images
1. Find out the differences in benefits based on your age
Your monthly Social Security benefit will vary based on a number of factors. But one of the biggest is your age when you first claim it. You qualify for your standard benefit when you reach your full retirement age (FRA), which is 66 if you were born in 1954 or earlier, 67 if you were born in 1960 or later, and somewhere in between if you were born between 1955 and 1959.
You get an increase for every month that you delay it beyond FRA and a decrease for every month that you take it sooner. The earliest you can claim is at 62, and the increases for waiting stop at 70. The table below shows your minimum and maximum benefit based on different standard benefit amounts.
| Standard Monthly Benefit at FRA | $1,500 | $2,000 | $2,500 | $3,000 |
|---|---|---|---|---|
| Claiming at 62 | $1,125 | $1,500 | $1,875 | $2,250 |
| Waiting until 70 | $1,980 | $2,640 | $3,300 | $3,960 |
Calculations by author.
You can get a good sense of what your benefit will look like by signing up for mySocialSecurity at the Social Security Administration website. When doing retirement planning, you forecast your expected income against your expected expenses. This will give you an idea of whether you'll have more than enough, just enough, or come up short each month. And since the age you start taking Social Security payments determines how much you receive, that decision will play a major role in how well you can pay your bills.
2. Guesstimate your life expectancy
While how much you get monthly depends on your age, the total you collect from the system depends on your life span. You can see below how this would play out with different life expectancies, an FRA of 66, and a hypothetical benefit of $2,000 at FRA.
| Claim at 62 | Claim at 66 | Claim at 70 | |
|---|---|---|---|
| Live to age 75 | $234,000 | $216,000 | $158,000 |
| Live to age 80 | $324,000 | $336,000 | $316,800 |
| Live to age 85 | $414,000 | $456,000 | $475,200 |
Calculations by author.
As the bold numbers show, the longer you think you'll live, the more sense it makes to take this benefit later in life, while the shorter your life expectancy, the better it is to take it early. And if you have an average life expectancy, waiting until your FRA may be best.
But projecting how long you will live requires making a guess based on factors like your general health and whether or not there is a history of longevity in your family.
3. Examine your needs
Ultimately, when you take Social Security might come down to how much you need it. And even if you determine that you'll benefit most by delaying it, a lack of other income sources could prevent you from doing so. But planning for this potential roadblock could help you avoid it.
Beefing up your retirement savings is one move. If you save enough, you could still retire early and live off your savings while you wait to claim higher Social Security benefits. This may seem difficult, but small amounts saved and invested over 25 years could add up big. The table below shows how various annual contributions grow at different annual rates of return over 25 years.
| $1,200 | $2,400 | $3,600 | $4,800 | |
|---|---|---|---|---|
| 8% | $94,745 | $189,491 | $284,236 | $378,981 |
| 9% | $110,789 | $259,636 | $332,366 | $443,155 |
| 10% | $129,818 | $259,636 | $389,454 | $519,272 |
Calculations by author.
Studies have shown that keeping your annual withdrawal rate at 4% or lower could help you avoid outliving your savings. So if you accumulated $500,000 by your first year of retirement, you could withdraw $20,000 annually, or about $1,660 a month, under this scenario.
Cutting your expenses also helps with this goal -- getting rid of enough bills so that you don't need the extra income could work just as well.
You could also delay your retirement. You may have an ideal date or age in mind, but if you think you could live a long and happy life and are in good health, giving yourself a few extra years to save could be a game changer.
Social Security will probably be one of your main sources of income in retirement. And when you start to take it could be the difference between a comfortable retirement and being stressed about living on a fixed income. Giving yourself time to plan for this big decision will help you make the best possible choice.
