When you are getting ready to claim your Social Security benefits, there are three rules you should be prepared to live by. If you break any of them, you could find yourself facing financial hardship in retirement, or could end up with much less money from Social Security than you would otherwise receive.
Here's what these three crucial rules are.
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1. Don't try to live on Social Security alone
The single most important Social Security rule to follow is that you cannot live on your retirement benefits alone. You absolutely must have other income sources to have a comfortable retirement.
When Social Security was designed, the goal was not for benefits to be your sole source of support. Social Security was meant to work in conjunction with a pension and savings to provide for your needs in retirement. These three sources of income were referred to as a "three-legged stool" that would support you.
Because you weren't meant to live on Social Security by itself, the benefits program wasn't created to provide enough income to cover all your needs. Your checks are meant to replace about 40% of pre-retirement income, and no one can afford to take a 60% cut to their pay and still have a reasonable quality of life. Most experts advise replacing 80% or more of what you were earning, so you should not retire unless you can do that.
If you break this rule and attempt to live on Social Security alone, be aware you'll likely be living with income just barely above the poverty level, and know that you may not be able to comfortably pay for your healthcare, housing, and other essential expenses.
2. Calculate your break even point before claiming benefits
Another crucial Social Security rule has to do with maximizing your lifetime benefits -- an important goal, since you'll pay into Social Security for your entire working life.
You can maximize your lifetime benefits by being strategic about what age you claim Social Security for the first time. You can claim any time between age 62 and 70, but will get larger monthly payments for each month you delay up to age 70. Of course, delaying means forgoing entire checks you'd have received had you claimed sooner, so you'll want to calculate how long you must receive the higher payments in order to break even.
Say for example you could claim a benefit of $1,050 at the age of 62, or could wait until 70 to increase that benefit to $1,860. Delaying for eight years would mean passing up 96 months of $1,050 benefits or $100,800 -- but your benefit would be $810 per month higher once you eventually claimed it. Divide $100,8000 by $810 to see that you'd have to get your bigger benefit for 124.4 months, or 10.37 years, to break even.
If you are in poor health or don't anticipate living beyond the age of 81, an earlier claim would give you more lifetime benefits -- but if you think you'll live longer, a later claim would. Doing this math is helpful so you can make the most informed choices about how to get the most Social Security income into your bank account.
3. Work for at least 35 years before starting Social Security
Finally, the last Social Security rule you should seriously think about following is to work for no less than 35 years before getting your first retirement benefits check. This rule is important to maximize monthly income.
See, your Social Security benefits formula gives you benefits equal to a percentage of the income you made during the 35 years your earnings were highest. Working less than 35 years results in some years of $0 wages, reducing the average income benefits are based on, thus shrinking the amount of your checks. If you can put off retiring to avoid this, you should likely do so.
By following these three rules, you can make the most of your Social Security benefits and help maximize the chances you'll have the financial security you deserve as a retiree.
