If you're thinking that Social Security will provide much of your retirement income, think again. As of August, the average monthly Social Security retirement benefit was $1,840. That's only about $22,000 over the course of a year. Fortunately, though, if you've earned more than average in your working life, your benefits will be above average. There's a limit, though. The maximum monthly benefit for those who start collecting in 2023 after having waited until age 70 is $4,555 -- about $54,660 annually.
Relatively few of us will be able to qualify for that $4,555 benefit, though. Still, there are multiple ways to beef up your benefits, and, just as importantly, some powerful moves to make before retirement.
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Qualifying for the maximum $4,555 benefit
Here's what you need to do to qualify for that $4,555 maximum benefit:
- Work for at least 35 years -- because the formula used to calculate your benefits is based on your earnings in the 35 years in which you earned the most (adjusted for inflation).
- Earn (at least) the maximum taxable earnings in each of those 35 years. That's $160,200 for 2023 -- and a tall order for most folks.
- Delay collecting your benefits until age 70 -- because for every year beyond your full retirement age (66 or 67 for most people) that you postpone starting to receive your benefits, they will increase by about 8%.
You may now see that you're unlikely to qualify for the maximum benefit. Still, you can increase your future benefits. Delaying collecting them is one powerful strategy. You can also try to earn more in the working years you have left -- perhaps by taking on a side gig for at least a few years. Working more than 35 years can also make a difference, because for each additional year you work, the Social Security Administration will kick out one of your lowest-earning years when determining your benefits.
Smart pre-retirement moves
It's important to include Social Security in your retirement planning. But plan beyond it, too, to make sure you're saving and investing sufficiently. After all, you'll likely need more income streams in your later years than just Social Security. Here are seven smart moves you might make:
- Develop a solid retirement plan, determining how much income you'll need when retired and how you'll get it. Income sources might include dividends, annuities, rental income, or pensions.
- Pay off any high-interest-rate debt. Such debt, often from credit cards, can be debilitating. It may not be easy, but most, if not all, of us can get out of debt.
- Have an emergency fund able to support you for at least a few months, in case of, say, a job loss, health setback, or costly car repair. This may not seem retirement-related, but not having an emergency fund when you need one can derail your retirement.
- Make good use of tax-advantaged retirement accounts such as IRAs and 401(k)s. Traditional versions give you upfront tax breaks, while Roth versions offer tax-free withdrawals in retirement. You can contribute up to a total of $6,500 to IRAs in 2023, plus an additional $1,000 if you're 50 or older. The contribution limits for 401(k)s are more generous: $22,500 for 2023, plus $7,500 for those 50 and up. If your employer offers 401(k) matching funds, aim to contribute enough to max out the match -- as that's free money.
- Invest effectively -- which can be as simple as sticking with low-fee index funds. They can be powerful long-term wealth builders.
- Get savvier about personal finance, because the more you save, the more money you'll have available for saving and investing. Aim to live below your means, at a minimum.
- Consider consulting a financial advisor, too, if any of this feels stressful or intimidating. A good advisor can get you on a good track to a comfortable retirement.
You may not love the idea of learning more about Social Security and retirement planning, but the more you know, the greater financial security you may enjoy in the future. Resolve to make some of the above smart pre-retirement moves soon.
