4 Must-Knows Before Claiming Social Security
You may be someone who looks forward to the day you retire, or you may be someone who plans to work as long as possible. No matter which category you fall into, you should do some retirement planning to prepare for this major milestone.
And if you're eligible for it, your Social Security payments can play a major role in how comfortable you live once you stop working. Making the most of this benefit will involve knowing these four things.
1. Your FRA
When you take out your Social Security determines how much your monthly payment will be. If you take it at your full retirement age (FRA), you'll receive your standard benefit. That age is 66 if you were born between 1943 and 1954, 67 if you were born after 1967, and somewhere in between if you were born between 1955 and 1959.
You can take this benefit only at the age of 62, but the sooner you take it, your benefit will decrease every year. You can even delay it until age 70, and you'll receive a pay increase for every year you wait. For example, if your standard benefit is $2,200, your reduced payout at age 62 would be $1,650 and your increased payout at age 70 would be $2,900. The amount you receive each month can determine how well you can pay all your bills.
2. Estimating Your Life Expectancy
How long you will live will always be an estimate. But things like a long family history and being in good health can make you more likely to live a long life. It matters when you take out Social Security, because it can determine how much you draw from the system over your lifetime.
If you survive until age 75, you'll pay $257,400 if you take your benefits at age 62. If you take it out at age 66, you'll get $237,600, and if you wait until age 70, you'll get $174,000. If you live to age 80, you will receive $356,000 if you take it at age 62, $369,000 if you take it at age 66, and $348,000 if you take it at age 70. If you live until age 85, you'll get $455,400 if you take this benefit at age 62, $501,600 if you take it at age 66, and $522,000 if you wait until age 70 .
The less time you live, the more wise it is to take your profit early, while the longer you live, the more you can get out of the system if you delay it. And if your average life expectancy is around 80, taking this into your FRA may work best for you.
3. How Much You Have Saved (Or Would Have Saved)
Social Security is a guaranteed income source you'll have in retirement. And if you're the average American, it can make up about 40% of your pre-retirement income. You might even be a lucky person who has another guaranteed income source like a pension, and the more money you have coming in, the less you need to save. But for many people, making up for the remainder of this income depends on how much you save.
If your expenses in retirement will be $40,000 and your income is $20,000, you'll need an additional $20,000 each year if you plan to cover them. If your sources of income add up to $30,000, you'll only need $10,000. Studies have shown that if you have a portfolio invested in 60% stocks and 40% bonds, your risk of running out of money in retirement decreases if you limit your withdrawals to more than 4% of your account value. Do not keep
So with a $20,000 shortfall between your income and expenses, you'll need a $500,000 opening account balance to make up for it. But with a $10,000 deficit, you'll only need $250,000.
4. Whether you will still be working
Part-time work during retirement can count as one of your income sources and means your Social Security payments won't need to cover as many bills. So if you have $40,000 in expenses, get $20,000 in guaranteed income sources, and earn $10,000 from working, you'll only have a difference of $10,000, which can reduce the amount of retirement savings you need.
Whether or not you work in retirement also matters because if you work too much, it can negatively affect your payments. In 2021, if you are under your FRA, $1 will be deducted from your monthly payment for every $2 you make above $18,960. If you start your FRA during 2021, $1 will be deducted for every $3 you earn over $50,520 up to one month before you reach your FRA. If you're thinking of taking Social Security early but the amount to be deducted is significant, you might consider delaying it until your FRA when there are no penalties for working.
There is no universally correct time that you should take Social Security. But there is an age which may be better for you than others. And planning for it in advance and answering key questions that can increase or decrease your pay is vital to making the best decision for you.
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