On paper, Social Security appears fairly straightforward. You pay taxes to support it throughout your career, and once you retire, you get a monthly check that is largely based on how much you paid into the program.
In practice, it's a bit more complicated. The number of years you worked, the size of your salary, and the age you are when you begin collecting all play a role in determining what the ultimate size of your Social Security benefit check will be. As a result of those rules, your benefit can vary wildly from your neighbor's, even if you both earned about the same in total over your lifetimes.
It also means that you can have an impact on your monthly benefit level, even if you're closer to the end of your career than the beginning of it. With that in mind, here's how to squeeze an extra 24% out of Social Security each and every month.
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The time-vs.-money trade-off
The core strategy when it comes to getting that additional 24% is to wait until you reach age 70 to begin claiming your benefits. Simply by waiting to that point, your monthly benefit will be 24% higher than had you began collecting at your full retirement age (which is 67 for those born in 1960 or later).
You will face a trade-off, of course. By making the choice to delay until age 70, you will be receiving benefits for that many fewer months. Indeed, you can start collecting your Social Security retirement benefits as early as age 62. This means that there's a whopping eight years' worth of (reduced) benefit checks you'll be giving up to collect your largest possible monthly Social Security payment.
To make that work, you need to have a source of cash that will last you until you reach age 70. If you can keep working, that's one source of money. Otherwise, if you have a pension, savings, deferred compensation, or the proceeds from selling your own small business, might be able to tide you over until you begin collecting Social Security.
On top of that immediate financial need, you'll want to consider both your anticipated remaining lifespan and your overall health when considering when to start your Social Security benefit. If you don't expect to live much past age 70, then you'll likely be better off collecting earlier and enjoying the money while you can.
In addition, since the crossover point where your lifetime benefit is larger by waiting is somewhere in your late 70s to early 80s, consider how much use you'll get out of the money at that point in life. Many retirees slow down their spending as they age. As a result, you might find that you'll get more use getting access to your Social Security money early than you would by getting a larger total lifetime benefit by waiting.
Start planning now for a better retirement
That time-vs.-money trade-off is one of the key reasons why it's important to plan in advance before claiming your Social Security benefit. Another reason is the fact that, at its best, Social Security is designed to replace only around 40% of a typical retiree's annual earnings -- even less for those with higher incomes. If that's not enough to cover your expected costs in retirement, then you'll need another source of cash to live the lifestyle you'd like to have.
A guideline known as the 4% rule can serve as a reasonable starting place when it comes to setting a target for how much you'll need to save to come up with that cash flow. Based on that guideline, if you keep a diversified portfolio, you can spend 4% of the initial value of that portfolio in the first year of your retirement and adjust your withdrawals for inflation annually. Following that strategy, you have a very good chance of seeing your money last at least as long as your retirement does.
With that guideline in mind, for every $1 in annual costs you need your portfolio to cover, you'll want to have $25 invested at the time you retire. So if you think you'll need $1,000 per month -- $12,000 per year -- above what Social Security will cover, you'll want a portfolio worth $300,000 to make it work.
It takes time to build that kind of nest egg, and the sooner you get started, the better your chances are of reaching your target in time for your retirement. So get started now, and use both that 24% boost to your Social Security benefit and your improved nest egg as key tools to help your golden years be that much more financially comfortable.
