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This Could Be the 1 Flaw in Your Social Security Plan

By Maurie Backman - Mar 10, 2020 at 6:03AM

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You might plan to claim benefits later on in life, but wind up forced to take them sooner.

Your Social Security benefits are calculated based on your lifetime earnings -- specifically, your wages during your 35 highest-paid years in the workforce. But it's possible to raise your benefits by delaying them for as long as possible.

You're entitled to your full monthly benefit based on your earnings history once you reach full retirement age, or FRA. That age is either 66, 67, or 66 and a specific number of months -- it depends on your year of birth. You're allowed to claim benefits ahead of FRA, but doing so will shrink them in the process -- for life. You can also delay benefits past FRA, and for each year you do, you'll raise them by 8%, up until age 70.

Thus, planning to file for Social Security at age 70 is a solid retirement strategy. That extra income could buy you more wiggle room later in life to travel more, cover unplanned healthcare costs, or spend more time pursuing hobbies. But while it's smart to aim to sign up for Social Security at 70, that may not end up happening for one key reason: You're forced to retire early.

Serious-looking older man standing outside a building.

IMAGE SOURCE: GETTY IMAGES.

Will a forced retirement upend your Social Security plans?

An estimated 50% of seniors retire sooner than expected, according to TD Ameritrade, and the reasons run the gamut from health issues to losing jobs. If you have no choice but to stop working prior to age 70, then delaying Social Security until that point may not be feasible. After all, you'll need money to pay your bills, and in the absence of a large severance package or pile of savings, that may not be possible.

Of course, you may have the option to cut back on expenses drastically to make up for the fact that you've been forced into retirement. But if the reason for that scenario stems from health issues, then you could actually see your medical costs increase rather than go the other way.

The takeaway? Delaying Social Security is a smart bet, because the 8% yearly increase you get for your benefits is guaranteed for life. But circumstances could take the option to hold off on filing away. So, while you can plan on filing for Social Security at 70, you should prepare for the possibility that it may not happen but, rather, that you'll need to take benefits sooner.

However, there's a good way to make up for that absent jump in benefits, and it's to pad your nest egg as much as you can while you're still working. If you save enough money to pay your bills and then some, your financial plans won't take as heavy a beating if you're forced to claim Social Security at an earlier age than you'd like. And if you give yourself a long-enough window, you can build a large amount of savings without having to sacrifice too heavily while you're working.

Case in point: Socking away $400 a month for 40 years will leave you with $958,000, assuming your retirement portfolio delivers an average annual 7% return during that time (which is a reasonable assumption for a portfolio invested heavily in stocks). Now, you might argue that anyone with close to $1 million in savings doesn't need to delay Social Security, but remember, that boost in benefits is guaranteed, and while it may not be a necessity, it's a nice thing to have. At the same time, if you retire earlier than you want to with a nest egg that's substantial but not quite enough to pay all of your bills, you may have to file for Social Security sooner than planned -- but that won't necessarily hurt you in the long run.

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