Social Security will probably play an important role in funding your retirement, so you'll want to know the details about this benefit program before you leave the workforce.
In particular, there are three key Social Security facts you need to think about before you consider giving your notice.
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1. You aren't meant to live on Social Security alone
If you were planning on relying on Social Security as your sole source of retirement funds, you should know well before you leave the workforce that this most likely will not be a viable option.
Social Security was designed to make up one of the legs of a "three-legged stool" to support retirees, along with a pension provided by an employer and savings. It's only meant to replace about 40% of pre-retirement income since there's supposed to be other money coming in.
If you don't have an employer pension to serve as one of your support sources, the entire rest of your income typically must come from savings. This means your retirement accounts will need to produce enough money to replace another 40% to 50% of what you were earning before leaving work if you don't want a dramatic decline in your quality of life.
Before retiring, make sure you have the funds to do that. If you don't, staying on the job longer could help you pad your investment account balance.
2. Claiming Social Security at a young age is going to reduce your monthly checks
If you plan on claiming Social Security as soon as you retire, you should know that your age is going to affect the size of your monthly benefit.
Depending on your birth year, you have a full retirement age (FRA) between 66 and 6 months and 70 if you were born in 1957 or later.
Although you can claim Social Security starting at 62 and don't have to wait until FRA, doing so will shrink the standard benefit you'd be entitled to if you waited. Each month you're early, your payment is reduced. You'd end up with a 6.7% smaller check for each of the first three years you're early. If you start payments more than three years ahead of FRA, your check shrinks an additional 5% per year.
Waiting to claim Social Security until after FRA will have the opposite impact. Benefits grow each month you delay, resulting in an 8% annual increase. So, before you retire, you should know when your FRA is and how your choice to claim Social Security will impact whether you get your standard benefit, or receive more or less money from Social Security.
3. Working less than 35 years will lower your benefit amount
Finally, you should know the impact of your work history on your Social Security checks before retirement.
You must work for at least 10 years to earn enough work credits to claim Social Security on your own employment record. But your standard benefit is calculated based on a 35-year work history. Your earnings are adjusted for inflation, and you receive benefits equaling a percentage of average inflation-adjusted wages during the 35 years you made the most money.
If you're retiring before you've worked 35 years, you'll have a $0 wage year included in your average for each year you're short. Since this can reduce retirement checks, you may want to think twice about quitting so soon. If your earnings have increased a lot over time, you may also want to consider working for an extra year or two so those higher earning years become part of your average wage calculation.
By making sure you understand these three Social Security facts, you can ensure you don't inadvertently jeopardize your retirement security by making the wrong choices when it comes to your retirement benefits.
