Claiming your Social Security benefits is one of the most important things that you will do as you prepare for your future as a retiree. It's critical that you do it at the right time.
This choice about when to start benefits is key to your retirement planning process because your decision on Social Security benefits affects the money you receive in your bank account each month, as well as the lifetime income that Social Security is likely to provide to you.
Before you rush into making a decision that will permanently impact your financial security going forward, there are three tasks you absolutely must do prior to claiming benefits. Here's what they are.
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1. Break-even analysis
One of the first things that you must do before claiming Social Security is a break-even analysis. This involves comparing the amount of Social Security benefits you will get if you claim them at an earlier eligibility age versus if you claim them at a later age.
This is important because you can claim Social Security any time between 62 and 70. Benefits increase for each month that you delay. Your break-even analysis allows you to figure out how much income you give up by waiting and how long it will take for the higher payments to make up for the missed income.
You can sign into your mySocialSecurity account to see what your benefit amount would be for each age you're considering claiming at, and use this data to conduct your break-even analysis. For example, if you are deciding between claiming Social Security at 62 and at your full retirement age (FRA) of 67, here's what that calculation could look like if your benefit at FRA is $2,000 and your benefit at 62 is $1,400.
- If you wait from 62 until 67, you will give up 60 months of $1,400 monthly payments or $84,000.
- You will collect $600 more per month if you claim benefits at 67 instead of at 62 because you can avoid early-filing penalties by waiting until your FRA.
- At a rate of $600 per month, it would take you 140 months or 11.66 years to break even for the Social Security benefits you miss out on while waiting for benefits to increase.
This means that if you live more than 11.6 years after claiming benefits, you would end up with more lifetime income by waiting to claim. It's important to do this calculation so you can make smart choices about whether to claim Social Security early, wait to claim benefits, or claim right at your FRA. You can consider your break-even time and your health status to decide.
2. Confirm you have income to supplement benefits
Another key thing to do before claiming Social Security is to make sure you have money to supplement your retirement checks. Benefits are intended to replace about 40% of income, so if you don't have a good amount of money in your retirement plans, you could find yourself with a serious downgrade to your quality of living.
Of course, you could work while collecting Social Security. However, if you've claimed benefits before you have reached your FRA and you earn too much money, you will forfeit some of your retirement checks. Eventually, benefits are recalculated when you miss income, but there's still little reason to start your payments just to lose all the money anyway.
And, if you aren't planning on working while collecting, it's even more critical to make sure you can live off the Social Security and distributions from your 401(k) or other retirement accounts at a safe withdrawal rate, so you don't drain your savings too soon or find yourself struggling.
3. Coordinate with your spouse
Finally, it's critical to coordinate with your spouse if you are married. That's because your claiming decisions can affect them.
For example, if your husband or wife is planning on claiming spousal benefits on your work record, you need to claim your own benefits before they are allowed to do that. And if your spouse is going to rely on survivor benefits because you were the higher earner, an early claim on your part could shrink their future payments.
Taking care of all three of these tasks will help you decide if it's really the right time to claim your Social Security so you can make the most of your retirement benefits. This could make a big difference in ensuring you have the financial security you deserve.
