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Before You Claim Social Security, Do a Savings Checkup

By Maurie Backman – Aug 20, 2019 at 5:36AM

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A simple assessment could lead you to the right filing decision.

Millions of seniors collect Social Security benefits today, and coupled with a healthy level of savings, they could provide for a very comfortable retirement. But if you're lacking in the savings department, you may need your Social Security benefits to pick up the slack.

You can claim Social Security at any age between 62 and 70. In fact, you don't even have to file at 70 -- you can hold off past that point, though there's no financial incentive to do so. You may have your reasons for wanting to file at a certain age. But before you do, give your savings a checkup -- and make sure you can afford to claim benefits when you want to.

Claiming Social Security: Age matters

The age you file for benefits at will dictate how much monthly income you collect for the rest of your life. If you file at your precise full retirement age (FRA), you'll get the exact monthly benefit your earnings record entitles you to. That age is either 66, 67, or 66 and a specific number of months.

Older man and older woman at a laptop

Image source: Getty Images.

Filing before FRA will cause a reduction in benefits, the extent of which will depend on how early you claim them. If you're entitled to $1,500 a month at an FRA of 67, filing at 62 will leave you with just $1,050 a month instead. Meanwhile, claiming Social Security after FRA earns you an 8% boost in benefits for each year you delay, up until age 70. In this example, you'd boost a $1,500 monthly benefit to $1,860 by filing at 70.

Now there are different reasons to file at different ages. If you lose your job in your early 60s, for example, you may feel you have no choice but to claim benefits before FRA, even if that means reducing them in the process. But if you're in a less stressed financial situation, and there's no real pressing urge to claim benefits, then it pays to take a pause, assess your savings, and then let that inform your decision.

Imagine you have $500,000 in savings by age 62. You might think that's a lot of money to work with in retirement, but while it's certainly not a small amount, it may not provide as much annual income as you'd expect. Remember, the average senior today will live until their mid-80s, but 1 in 3 65-year-olds today will live past age 90. That means you may need your savings to last 30 years.

If that's the case, you'd be wise to start out by applying the 4% rule to your IRA or 401(k) balance and see how much annual income that allows for. The rule states that if you begin by removing 4% of your savings balance your first year of retirement, then adjust subsequent withdrawals to allow for inflation, your savings have a strong chance of lasting a sold three decades.

Now, if you're sitting on $500,000, the 4% rule gives you $20,000 in retirement income your first year, and probably slightly more the year after. If that's not enough to buy you the lifestyle you want, Social Security can supplement the difference, but if you file for benefits early, you may still wind up disappointed with your total annual income. On the other hand, if you file on time at FRA, or file after FRA, you'll get more money from Social Security, and you'll have a higher total annual income to pay your expenses without worry.

Let's go back to the $1,500 monthly benefit above. Take it at FRA, and you'll add $18,000 to your annual income, giving you a total of $38,000. If that sounds like enough to you, then you're in good shape to take benefits at FRA. If you want more, you'll need to delay benefits. And if you really plan to live modestly and therefore think you only need another $12,000 or so from Social Security to cover your expenses, you can claim benefits well before FRA if you've truly run the numbers and are convinced that won't hurt you financially.

The point either way is to give your savings a serious evaluation before claiming your benefits. It'll help you determine whether you can afford a reduction in Social Security, whether you'll be OK to claim benefits on time, or whether it's imperative that you hold off as long as possible to snag the highest boost.

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