3 Social Security Factors You May Be Forgetting

Chances are good you’re counting on Social Security to be a source of support in your senior years.

Unfortunately, if you’re like many people, there are a few facts about this popular retirement benefits program you may be overlooking when you anticipate the role your benefits will play in your financial security.

To make certain you’re realistic in your expectations, three Motley Fool retirement contributors explain three key Social Security facts you can’t afford to forget.

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Social Security benefits are meant to replace only 40% of wages

Christy Bieber: There are a few different ways to calculate the amount of retirement income you’ll need, but one of the easiest is estimating the percentage of your final pre-retirement salary you’ll have to replace.

As a general matter, most experts recommend aiming for about 80% to 90% of that salary, although some seniors end up keeping their spending at the same level or even spending more than they were earning while working.

That’s why it’s so important you realize that Social Security benefits are intended to replace just 40% of your wages. That’s not even close to the recommended amount of income in your later years. And if you tried to rely on Social Security alone, it would mean you’d be forced to live on less than half of what you earned during a time of your life that tends to be expensive due to high healthcare costs.

This key Social Security fact underscores the importance of setting aside money in a tax-advantaged retirement account. Distributions from it can supplement your benefits and ensure you have enough money that you don’t experience a major decline in your quality of life after your paychecks stop.

The age you claim will affect your benefit amount

Katie Brockman: Your basic benefit amount is determined by your wages throughout your career, and if you check your benefit amount online, you can see your estimated benefit amount based on your real earnings.

However, to receive that amount, you’ll need to hold off on claiming Social Security until your full retirement age (FRA). If you were born in 1960 or later, your FRA is 67 years old. If you were born before 1960, you have an FRA of either 66 or 66 and a certain number of months, depending on your birth year.

If you claim before or after your FRA, it will affect how much you receive each month. File for benefits earlier than your FRA (as early as age 62), and your benefits will be reduced by up to 30%. By waiting until after your FRA to claim (up to age 70), you’ll receive up to 32% extra on top of your basic benefit amount.

There’s no right or wrong answer as to what age you should claim. But it is wise to make sure you realize how your age will affect your benefit amount. The last thing you want is to be surprised when you receive your first check because it’s not what you expected.

When you know how the age you claim will affect your benefits, it’s also easier to plan for retirement.

If your savings are lacking and money is going to be tight in retirement, for example, it may be a good idea to consider waiting a while to claim so you’ll earn larger checks each month. Or if you have a healthy nest egg and can afford to live on smaller checks, you may decide to retire and claim benefits as soon as possible.

Regardless of when you decide to file for Social Security benefits, be sure you know how your age will impact your monthly payments. By doing your research before you claim, you can rest easier knowing you’ve made the best decision for your situation.

Your break-even point

Maurie Backman: When it comes to claiming Social Security, you have choices. You can sign up at full retirement age, which is either 66, 67, or somewhere in between, and collect your full monthly benefit based on your wage history. Or, you can sign up as early as age 62, albeit at a reduced benefit, or after full retirement age for a higher benefit (your benefit will grow up until the age of 70, at which point there’s no sense in delaying your claim).

Many seniors assess their choices based on how it will impact their benefits on a monthly basis. But what you also need to do is figure out which filing scenario gives you the most money on a lifetime basis. And to do that, you’ll need to calculate your break-even age.

Say you’re entitled to a monthly benefit of $1,500 at a full retirement age of 67. Claiming benefits at age 62 will mean getting $1,050 a month instead. However, you’ll break even at a little after age 78 1/2. This means if you think you’ll live beyond that age, you’d be better off not filing for Social Security early and instead waiting until full retirement age.

Similarly, if you decide to delay your filing in this situation to age 70, you’d turn a $1,500 monthly benefit into $1,860 a month. At that point, your break-even age becomes 82 1/2. If you don’t think you’ll live that long, you may not want to wait to file beyond full retirement age.

It’s always a good idea to run through different break-even points. Doing so will help you see the big picture and determine when you should file for benefits.

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