But the timing of your Social Security application will affect your monthly income for the rest of your life. And that means your benefits claim shouldn't be a spontaneous or reactionary move.
Before you file for your retirement benefits, take 10 minutes to validate your 2021 claiming strategy. If the four statements below are true for you, you're ready to claim.
1. You're comfortable with your savings
Social Security usually replaces about 40% of your working income, or less if you claim early. Most people can't pay the bills after a 60% pay cut, which means your savings need to help out too.
You can test the power of your savings with an easy equation, known as the 4% rule, developed by financial advisor Bill Bengen in the 1990s. He found that a 4% withdrawal rate with annual inflation adjustments could withstand history's worst financial market and inflation climates.
Essentially, retirees using the 4% rule could reasonably expect their nest egg to last 30 years or more.
To use the 4% rule, multiply your retirement account balance by 0.04. The answer is how much you can safely withdraw from your savings in the first year of retirement.
The 4% rule is a planning guideline, not an indisputable fact. Still, if 4% of your savings plus Social Security is nowhere near enough to pay your bills, then you have work to do before you can retire. In that case, consider holding off on Social Security to earn delayed retirement credits.
2. You have a plan for healthcare
According to a 2020 report from The Senior Citizens League, 66% of seniors spend more than $375 monthly out-of-pocket on healthcare. More than 30% spend over $1,000 monthly.
One report from the Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Fund estimates that Medicare premiums and cost-sharing amounts add up to about 24% of the average Social Security benefit.
One of the best plans for healthcare costs is a Health Savings Account (HSA) with a six-figure balance. If you don't have that today, this may be another reason to wait on your Social Security claim.
3. You have low or no revolving debt
When you're on a fixed budget, your spending needs to be efficient. You just don't have the breathing room to support expenses that don't add value to your life.
Interest charges on credit cards are among the most damaging of these "empty expenses." The interest rate on an average credit card is about 16%, which could be several times more than you're earning in your retirement account. Servicing those debts with low or minimum payments depletes your wealth -- and may also consume a big chunk of your budget in the process.
That's why it's important to pay off those credit card debts before you retire. If you can't bring down your balances with monthly payments, you may have to use your savings. You could then delay retirement and Social Security for a year to top off your savings account.
4. You know how you'll spend your time
A study commissioned by National Citizens Service in the U.K. found that the average retiree fell into boredom just one year into retirement.
Returning to the workforce is one common cure for boredom, but it comes with Social Security implications. If you claim Social Security before your Full Retirement Age (FRA), you are subject to income limitations. The penalty for exceeding those limits is a reduction in your Social Security benefits.
However, you don't have to worry about the income limits when you claim after FRA. Still, you may regret claiming in 2021 if you later return to work.
One positive is that you can suspend Social Security temporarily. Even better, you'll earn delayed retirement credits during that suspension.
Be ready, financially and emotionally
Your financial readiness is an important factor in your decision to claim Social Security -- but your emotional readiness plays a role, too. If your finances are in good shape, think through how you plan to spend your work-free days.
If your ideal activity has a cost, like traveling the world, add that to your retirement budget and then reevaluate your savings using the 4% rule.
If your finances still pass the test, awesome. Your hard work has paid off and you're ready to embark on a new chapter!