Approaching retirement and considering claiming Social Security benefits this year can be both exciting and challenging. To make sure you're equipped to make the best decisions for yourself, here are four questions you should be prepared to answer.
Answering these questions will ensure you're as informed as possible as you embark on your next life phase.
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1. What's your full retirement age?
Your full retirement age, which is based on your birth year, is the age you're eligible to receive your full Social Security benefit.
| Birth Year | Full Retirement Age |
|---|---|
| 1943 to 1954 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 or after | 67 |
Data source: Social Security Administration.
Although your full retirement age is when you're eligible for your full Social Security benefits, you can begin receiving benefits as early as age 62. Doing so will reduce your monthly benefit based on how many months away from your full retirement age you are.
Benefits are reduced by 5/9 of 1% if you're within 36 months of your full retirement age, and 5/12 of 1% monthly for each month over month 36. For example, if your full retirement age is 67 and you take benefits at 62, they'll be reduced by 30%.
You also have the option to delay your benefits past your full retirement age, increasing them by 2/3 of 1% for each month until you reach age 70. You can technically delay benefits past 70, but they won't increase anymore after that, so doing so is pointless.
2. How much will you need in retirement?
Unfortunately, there's no one-amount-fits-all answer to how much you'll need in retirement. Someone retiring in the Hamptons in New York or Palm Beach, Florida, will likely need more than someone retiring on a ranch in Montana or beachside in North Carolina.
Guidelines like the 80% rule can help you determine how much you may need. The 80% rule says retirees should plan to have 80% of their last working year's income in retirement to maintain their current lifestyle. For example, if you make $100,000 in your last working year, you'd aim to have $80,000 annually in retirement.
You should adjust the percentage based on whether or not you plan to upgrade or downsize your lifestyle. Either way, 80% is a good starting point.
3. How much will you be receiving from Social Security?
Once you have an idea of how much you'll need annually in retirement, you need to get an idea of how much you'll be receiving from Social Security. The best way to do this is by visiting the Social Security website, creating an account if you don't have one, and checking your earnings record.
Your earnings record will tell you your projected monthly benefits based on when you decide to claim them (early, on time, or late).
Having an idea of how much you'll need in retirement and how much will be coming from Social Security can help you better plan out how much you may need from other sources, such as a 401(k) or IRA. For example, you may debate claiming benefits early and then realize the gap between the two is too much and delay benefits a bit.
4. Will you be working while receiving benefits?
Claiming Social Security benefits doesn't mean you have to stop working entirely. However, you should monitor your earnings because they may impact your monthly benefits. Social Security uses a retirement earnings test (RET) for those who start receiving benefits before reaching their full retirement age and who earn more than a set amount.
If you claim benefits early and won't reach your full retirement age in 2023, your earnings limit is $21,240. Earning over these amounts will reduce your benefits, but the withheld amount will be gradually added back to your monthly benefits once you reach your full retirement age.
For example, imagine your full retirement age is 67, and you claim benefits at 64 while earning over the limit. If the RET reduces your annual benefits by $2,000, Social Security would withhold $6,000 during the three years until you turn 67. Once you turn 67, Social Security would recalculate your benefits to gradually return your $6,000 over time.
Finally, if you reach your full retirement age in 2023, you can earn up to $56,520 in the months leading up to it -- and as much as you want beyond that date.
