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When we think of Social Security, most of us immediately think of seniors. And while it’s true that seniors make up the vast majority of those claiming benefits, they’re not the only ones who ought to be thinking about their checks.
You might be decades away from claiming, but the decisions you’re making today have a huge effect on your future finances. Here are two reasons you need to begin preparing for your Social Security benefits right now.
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1. The size of your Social Security benefit affects how much you must save for retirement
Obviously, the larger your Social Security benefits are, the less money you’ll need to save on your own for retirement. If you don’t know how large your Social Security checks will be, you can’t figure out how much you personally need to save. That could lead to a dangerous financial shortfall.
It’s not easy to know exactly how much you’ll get from Social Security before you claim because your benefit is based on your income during your working years. But you can get an estimate by creating a my Social Security account. Here, you can view the record of all the income you’ve paid Social Security taxes on over the years and see what kind of benefit you’ll qualify for at various starting ages. You can also see how changes to your annual income could affect your benefit.
Use this information to decide on the best time for you to sign up for benefits. Starting as soon as you become eligible at 62 might seem like a good idea, but doing so shrinks your checks. Every month you delay benefits boosts your monthly payout until you hit 70.
Or if you don’t want to wait that long, you could claim in the middle at your full retirement age (FRA). That’s somewhere between 66 and 67 for today’s workers.
Once you have an idea of when you plan to claim and what your monthly benefit will be, you can figure out how much you need to save on your own for retirement. Multiply your estimated monthly Social Security benefit by 12 to get your estimated annual benefit. Then subtract this from your estimated annual expenses to figure out how much you have to come up with.
If you find you’re not saving enough right now, try to boost your savings rate or consider delaying retirement to give yourself time to make up the difference.
2. Understanding how Social Security works can help you maximize your benefits
Once you know how the government calculates your Social Security benefits, you can leverage this information to maximize your benefit. There are a few ways to do this.
First, do what you can to maximize your income right now. The government bases your benefit on your average monthly earnings over your 35 highest-earning years, so larger paychecks today correspond to larger Social Security checks in retirement — with one exception.
Those who earn more than $147,000 in 2022 won’t boost their Social Security checks by upping their income. That’s because you only pay Social Security taxes on the first $147,000 you earn this year.
You can also increase your benefits by choosing your claiming age carefully. Typically, those with shorter life expectancies benefit more by claiming early, while those who expect to live into their 80s or beyond get more overall by delaying benefits. But you don’t have to follow this rule if you don’t want to.
Married couples can maximize their household benefit by choosing the right time for each person to sign up. When both people earned similar amounts over their lifetimes, it’s best for each to delay benefits as long as possible. But if one person significantly outearned the other, it’s more important for the higher earner to delay. The lower earner can start early if need be to help the couple out. Then, when the higher earner signs up, the Social Security Administration will switch the lower earner to a spousal benefit if it’s worth more than what they qualify for on their own.
Be ready to adapt as necessary
Thinking through your Social Security claiming strategy is a smart move, but you can also be flexible. Your retirement goals could change over time, and the government could make changes to Social Security too. Review your Social Security strategy every year when you look over your retirement plan so you can stay on top of any changes.
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