Once you reach the age of 60, you're very close to being able to sign up for Social Security. So at that point, Social Security is something you're likely to start reading up on.
But what if you're 30, not 60? At that point, your financial priorities may be to pay off your remaining student loans, buy a house, and sock money away so you're able to afford day care for your eventual children. Retirement may be the last thing on your mind -- and Social Security may be something you just don't want to bother with.
But actually, it's important to read up on Social Security well ahead of retirement. And here are some particular points it'll help you to know.
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1. How much replacement income you get
It's a big myth that Social Security will replace your pre-retirement paycheck in full. So the sooner you get your facts straight there, the sooner you may be inspired to begin building a retirement nest egg of your own.
Generally speaking, you can expect Social Security to replace about 40% of your pre-retirement wages if you earn an average income. If you're a higher earner, you might get less replacement income from those benefits.
This formula, however, assumes that Social Security benefits are not cut broadly in the coming years. If that happens as a result of the program's financial issues, they'll replace even less of your former salary. Knowing this might be the motivating factor you need to start prioritizing contributions to your 401(k) or IRA despite the many other expenses you may be grappling with.
2. How benefits are calculated
There are two factors that determine what monthly benefit you'll get from Social Security -- your lifetime wages, and your filing age. You're entitled to claim Social Security starting at age 62. But you can't claim your full monthly benefit based on your income history until full retirement age arrives. If you were born in 1960 or later, that age is 67.
This is an essential thing to know, because if you were banking on leaving the workforce in your early 60s and collecting Social Security right away, that's a plan you might need to rethink. You especially don't want to set yourself up with a reduced monthly benefit for life if you've gotten a late start on the retirement savings front and aren't confident in your ability to retire with a larger nest egg.
3. How many years you need to work
Maybe you're 30 years old and have been plugging away at a job since age 22. You may have the goal of retiring at age 50. But you should know that your Social Security benefits are calculated based on your 35 highest-paid years in the labor force. And for each year you don't have any income on record, a $0 gets factored into that calculation.
So going back to our example, you may only be planning for a 28-year career. But that could mean getting a lot less income from Social Security down the line.
You might think you have plenty of time to learn about Social Security if you're nowhere close to retirement. But actually, the sooner you educate yourself on how the program works, the better positioned you'll be to incorporate those benefits into your retirement plans -- and set yourself up for a financially stable future.
