Preparing for retirement can be stressful and complicated for workers, but it's a necessity. One way to make sure you're as ready as you can be is to listen to the advice of current retirees regarding what's important.
To that end, recent research from Wells Fargo revealed those who have left the workforce largely agree on one key step: making the most of Social Security benefits. Close to half of all retirees cited this as the most important item when it comes to retirement planning, and it's one that younger workers cannot overlook.
How to make the most of Social Security benefits
Making the most of your Social Security benefits starts with understanding how to maximize your monthly and lifetime income. And to do that, you need to know what factors affect your benefit amount. First and foremost, you need to know that claiming your benefits prior to full retirement age (FRA) will result in a reduction in the size of your monthly checks.
Every retiree has a FRA based on their birth year, which is between 66 and 67. If you wait until after FRA to claim your benefits, you earn delayed retirement credits until age 70 and get larger monthly checks, but you miss out on some years of income.
If you claim benefits before FRA, you start getting money right away, but you're hit with early-filing penalties that reduce the amount you receive each month. You'll want to think about your likely life expectancy, as waiting to claim benefits pays off only if you live long enough that the higher benefits you get later on in life make up for the income you missed.
You also want to make sure you've worked for at least 35 years. That's because your benefit is based on inflation-adjusted average earnings in the 35 years you earned the most. Social Security doesn't adjust that formula for those who work for fewer years. Instead, if you haven't been on the job long enough, your average is simply reduced by years of $0 wages factored in.
If you don't want that to happen, stick it out in the workforce a little longer. In fact, you could boost this average by working more than 35 years if you're earning a lot toward the end of your career and want some higher earning years to replace lower earning ones when your average is calculated.
Finally, you should work with your spouse so you can decide on a Social Security claiming strategy that maximizes combined benefits if you're married. Since survivor benefits are reduced if the higher earning spouse claims early, it may make sense for the lower earner to start getting benefits first to provide the family with income while the higher earner delays and gets the largest benefit possible.
Maximizing your benefits could make all the difference
It should come as no surprise that so many retirees believe making the most of Social Security is essential for financial security. These benefits provide half of all income for 50% of married retirees and for 70% of singles who've left the workforce. And for a fifth of married couples and 45% of singles, they're the source of 90% of retirement income.
The good news is, the steps involved in maximizing your benefits are easy to understand. Now that you know what's involved, you can start making plans today to potentially delay claiming your benefits, put in your 35 years on the job, and choose a Social Security claiming strategy that's right for you.