Your 50s are a critical retirement planning period because while you're closing in on the day you'll leave full-time work behind, you still have time left to make adjustments.
Social Security benefits may not seem like they require much advance planning. After all, you can't even begin claiming them until you turn 62, so you might think there's nothing you need to do before then to prepare. However, there are a few moves you should make now that will be helpful to you later.
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1. Decide what age you want to begin claiming benefits
To qualify for monthly checks that are 100% of the amount you're theoretically entitled to, you'll need to begin claiming at your full retirement age (FRA), which is age 67 for those born in 1960 or later -- which means everyone now in their 50s. If you claim before your FRA, the size of your benefit checks will be permanently reduced by as much as 30%. But if you wait until after your FRA to begin claiming (up to age 70), you'll receive your full benefit amount, plus a delayed retirement credit of 8% for each year you postponed filing for Social Security.
Some people mistakenly believe that if you claim early, the benefit reductions are only temporary and you'll start receiving your full benefit amount once you reach your FRA. In truth, once you begin claiming, while you'll get the sames annual cost of living adjustments as other beneficiaries, you're generally locked into those reduced payments for life.
Let's assume you are in your 50s, so your FRA is 67. If you were to claim at 62, your benefits would be reduced by 30%. But by waiting until age 70 to claim, you'd receive your full benefit amount plus an extra 24% each month.
The average Social Security benefit as of January was $1,503 a month. Cut that by 30%, and you lose $451 a month -- $5,412 a year. But add 24%, and you'll be getting $361 more a month. If Social Security is likely to be a significant source of income for you in retirement, it's vital to make this decision carefully.
2. Think about how much of your income will be replaced by Social Security
Social Security benefits are designed to replace around 40% of your pre-retirement income, but that's only a rough guideline. And the question of what share of your expenses that will actually cover is going to depend both on what age you begin claiming benefits and how much you wind up spending in retirement.
To get an estimate of how much you'll receive in benefits, you can create a mySocialSecurity account, which will allow you to check your statements. The government website will use your actual past earnings to calculate your likely future benefit amount. Just keep in mind that the algorithm makes a number of assumptions, including that you'll be claiming at your FRA.
Once you have an idea of how much you can expect to collect from Social Security, you'll have a baseline to start figuring out how much additional retirement income you'll need to get from your investments and other sources. And with that data, you'll be able to make an informed prediction about whether or not you're on track to reach retirement age with a nest egg sufficient to meet those needs.
3. Create a backup plan in case Social Security benefits are reduced
The future of Social Security is uncertain, because major demographic shifts are happening in this country. The program relies primarily on payroll taxes on workers to fund benefits. For many decades, those taxes were more than sufficient to cover the expenses, and the surplus went into what are known as the Social Security Trust Funds. Today, however, with the massive cohort of baby boomers retiring and with people living longer than ever, the amount of money being collected in payroll taxes each year isn't enough to cover the retirement benefits Americans are owed.
The good news is that this is what the Trust Funds are there for, and the Social Security Administration has begun withdrawing money from them to cover the gap. The bad news is that the difference between payroll tax income and benefit check outlays is only going to widen in the years to come, and the entire Trust Fund balance is expected to be depleted by 2034, according to the SSA Board of Trustees' latest projections.
Once the Trust Funds run dry, the money collected in payroll taxes will only be enough to cover around 76% of future benefits -- meaning monthly checks could be slashed by around 24% if Congress doesn't find a solution before 2034. President Trump is also pushing to eliminate payroll taxes altogether, which could spell disaster for the Social Security program.
Congress may yet pass a law that keeps the Social Security program solvent, but it's a good idea to have some backup plans in mind just in case political gridlock on the question leads to a day when the program's benefit payments -- and yours -- must be significantly reduced. It can't hurt to have more in your retirement fund so that you're prepared for a worst-case scenario.
Social Security benefits can go a long way toward allowing you to enjoy a financially secure retirement, but it's important to think through when you plan to claim them, and calculate how much you'll be able to rely on them to do for you. By considering these factors in the decade leading up to retirement, you can make adjustments to your plans as needed, and ensure you're as prepared as possible.
