If You Can’t Answer These 3 Questions, You Have No Business Claiming Social Security

Many people approach and enter retirement having saved some money, hoping for the best. Many might be counting on Social Security to deliver much of what they need, and if so, they probably don’t realize that the average monthly Social Security retirement benefit was recently just $1,666 — or about $20,000 annually.

While Social Security may not deliver as much as you hope for, it’s still likely to provide a big chunk of your retirement income, so it’s vital to make savvy decisions. Before you claim your benefits — something you can do beginning at age 62 — be sure you can answer the following questions.

1. How much income do I need in retirement?

First off, no matter how old you are now, you need a detailed retirement plan. Take the time to estimate how much income you will need in retirement — and how you will make that income happen. It’s likely to be assembled through a combination of sources such as Social Security, your savings, and perhaps an annuity and/or pension.

You might start by getting an estimate of how much income you might expect from Social Security. You can do that by setting up a my Social Security account at the Social Security Administration (SSA) website. There you’ll find estimates of your future benefits, along with the SSA’s record of your earnings year by year, too.

If you estimate that you’ll need $80,000 annually in retirement and you expect to collect $25,000 from Social Security, that leaves $55,000 in needed income, which you might need to fund via your investment account.

The table below shows nest eggs of various sizes and how much annual income each will provide in your first year of retirement if you use the (flawed but still helpful) “4% rule.” (You might aim to have your money last longer by taking out a smaller percentage regularly — or simply use a different withdrawal strategy.)

Retirement Nest Egg

4% Withdrawal

$100,000

$4,000

$250,000

$10,000

$500,000

$20,000

$750,000

$30,000

$1 million

$40,000

$1.25 million

$50,000

$1.5 million

$60,000

$2 million

$80,000

$2.5 million

$100,000

Source: Author calculations.

So if you need $55,000 in income, you might aim for a retirement account valued between $1.25 million and $1.5 million. How will you amass that? Well, the table below shows what might be achieved if you save and invest for years and average annual gains of 8%:

Growing at 8% for

$10,000 invested annually

$15,000 invested annually

$20,000 invested annually

5 years

$63,359

$95,039

$126,718

10 years

$156,455

$234,683

$312,910

15 years

$293,243

$439,865

$586,486

20 years

$494,229

$741,344

$988,458

25 years

$789,544

$1,184,316

$1,579,088

30 years

$1,223,459

$1,835,189

$2,446,918

Source: Author calculations.

It’s also useful to read up on safe withdrawal rates in retirement that can make your money last as long as it needs to. One school of thought recommends withdrawing 4% in your first year and adjusting for inflation thereafter. The table below shows what you’d get in that first year using a 4% withdrawal rate, depending on the size of your nest egg:

Retirement Nest Egg

4% Withdrawal

$100,000

$4,000

$250,000

$10,000

$500,000

$20,000

$750,000

$30,000

$1 million

$40,000

$1.25 million

$50,000

$1.5 million

$60,000

Source: Author calculations.

2. What’s my “full retirement age”?

This next question you’ll need to answer before claiming Social Security benefits is much easier than the last one. What’s your full retirement age? Each of us has one, and for most of us it’s 66, 67, or somewhere in between. It’s the age at which we can start collecting the full benefits to which we’re entitled, based on our earnings history.

3. When is the best time for me to claim Social Security?

You can start collecting benefits as early as age 62 and as late as age 70. Starting before your full retirement age will shrink your benefit checks, but you’ll get many more of them. Delaying beyond your full retirement age will increase them — by about 8% per year up to age 70.

To get the most out of the Social Security program, you should carefully decide when it’s the best time to start receiving your benefits. There’s no one-size-fits-all best time. You’ll want to consider your expected longevity, for starters. If you’re likely to live a longer-than-average life, delaying can be worth it. If many of your relatives died in their 70s, consider starting early. If you’re married, it’s smart to coordinate a strategy with your spouse — such as having the higher earner delay as long as possible, because whenever one of you dies, the other will get to collect the larger of the two benefit checks.

Note, too, that there are ways to increase your Social Security benefits, such as beefing up your income for a little or long while and working a few more years.

So get that retirement plan in order, start thinking about what Social Security strategies will serve you best, and look forward to as comfortable a retirement as possible.

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