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Once you retire, you can’t expect your expenses to plunge dramatically. As a rough general rule, you should expect to your spending to total about 75% of your pre-retirement spending, not accounting for major lifestyle adjustments.
That means you may become heavily reliant on Social Security once you exit the workforce. And that’s why you can’t afford to buy into these glaring misconceptions.
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1. Your benefits will replace your entire paycheck
If you’re an average earner, you can expect your monthly Social Security checks to replace about 40% of your pre-retirement income. If you’re a higher earner, you can expect an even smaller percentage of replacement income, since Social Security has a maximum monthly benefit it pays.
If your plan is to retire on Social Security alone, you may end up struggling financially once you realize how expensive your senior years end up being. And so rather than go that route, it makes sense to build independent savings to supplement your benefits. That could mean consistently funding a 401(k) plan if your employer offers one, or socking money away in an IRA.
2. Your filing age doesn’t matter
The earliest age you can sign up for Social Security is age 62. But you’re not entitled to your full monthly benefit until you reach full retirement age (FRA).
FRA doesn’t kick in until age 66, 67, or somewhere in between, depending on your year of birth. And for each month you file for benefits before FRA, they’ll be reduced, the extent of which will hinge on how early you file.
Now you can also delay your Social Security filing past FRA, and that’s a move you may want to consider if you’re entering retirement without much money in savings. For each year you delay your filing beyond FRA, your benefits increase 8%, up until age 70.
No matter what filing age you ultimately land on, know that it does, in fact, matter when you sign up for benefits. And so it’s important to put a lot of thought into that decision.
3. Filing early will only cause a temporary hit to your benefits
We just learned that filing for Social Security before FRA will cause your benefits to shrink. You may have been led to assume that once you reach FRA, your monthly benefits will be restored to their full amount. But that’s not how things work.
Once you file for Social Security early, the benefit you lock in is the amount you’ll generally receive for life, not accounting for the annual cost-of-living adjustments benefits are subject to. Now in some cases, you may be able to avoid a permanent reduction in your benefits by withdrawing your Social Security claim within 12 months and repaying the money you received in benefits within that time frame. But since that’s not an easy thing to do, filing for benefits early could mean slashing them permanently.
Get the right information
Knowing the ins and outs of Social Security could help you avoid mistakes in the course of claiming benefits and planning for retirement. Keep these key points in mind to avoid a world of regret later in life.
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