If it weren't for Social Security, a lot of older Americans would no doubt struggle to cover their living costs. Thankfully, those benefits serve as a steady stream of income for millions of retirees.
There's a good chance Social Security will play a big role in your retirement finances, too. So it's important to sign up for benefits at the right time. Even though your benefits are based on your personal earnings history, your filing age helps determine how much money you get each month.
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You're eligible for your Social Security benefits without a reduction at full retirement age, which is 67 if you were born in 1960 or after. You can claim Social Security as early as 62, but your benefits will be reduced for each month you sign up for them before reaching full retirement age.
You also have the option to delay your Social Security claim until age 70. Each year you hold off boosts your benefits by 8% for life.
It's important to be confident that you're claiming Social Security at the right time. For that to happen, you need to do these three things first.
1. Figure out your income needs
The lifestyle you want to lead in retirement will help determine how much Social Security you'll need. Think carefully about where you want to live and how you want to spend your days.
Some people say they'll be happy doing projects around the house in retirement. But if you're someone who needs to get out and keep your mind very engaged, you might need a larger entertainment budget.
Similarly, some retirees opt to downsize to lower their housing costs. If you want to keep your larger home, and the giant property tax bill that comes with it, you'll need to account for the expense.
2. Determine how much annual income your savings will give you
Ideally, you've saved a decent chunk of money for retirement that can supplement your Social Security. Before you sign up for benefits, figure out how much annual or monthly income your IRA or 401(k) will actually provide for you.
If you have a 401(k) plan with a $1.5 million balance, that might look like a huge amount of money. And it is.
But if you apply a 4% withdrawal rate, which is in line with what financial experts tend to recommend, that gives you an annual income of $60,000. If you want to travel a lot and live in an expensive part of the country, you may need a decent amount of Social Security to pull that sort of lifestyle off, even with getting $60,000 a year from your 401(k).
3. Talk things through with your spouse
It may be that your spouse worked for many years and is entitled to monthly benefits of their own. Or maybe your spouse didn't work, and they're planning to claim spousal benefits from Social Security.
It's important to get on the same page as your spouse when it comes to Social Security and devise a strategy that helps you maximize your benefits together. That could mean having the higher earner delay their claim for boosted checks while the lower earner files on time. Or, it could mean having both of you wait past full retirement age to score larger monthly benefits that allow you to fulfill your retirement dreams.
The decision to claim Social Security is one of the most important ones you might ever make, so it's important to get it right from the start. Make sure to tackle these three items so you don't end up regretting your decision later in on retirement.
