Claiming Social Security could end up being one of the most stressful decisions you’ll have to make in the context of your retirement planning. And there’s a reason for that. Although the monthly benefit you’re entitled to in retirement is calculated based on your earnings history, your filing age also helps determine how much money Social Security pays you each month.
If you claim benefits at full retirement age, you’re considered to be filing on time. That means you’ll get the exact monthly benefit your earnings history renders you eligible for — no reductions or increases. Full retirement age is 67 for anyone born in or after 1960.
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However, you should know that you can claim Social Security as early as 62. Doing so will shrink your benefits, but you’ll get your money sooner. You’re also entitled to an 8% boost for each year you delay Social Security past full retirement age, up until you turn 70.
It’s important to calculate what benefit you’ll get at different ages so you know what to expect. But there’s another key move to make before claiming Social Security — no matter what filing age you’re leaning toward.
Understand how much income your savings will give you
Your Social Security filing age is tied directly to your monthly payments. Before you can decide whether you can afford a hit to your benefits or whether you need a boost, it’s essential that you understand what your income picture looks like.
To that end, you should try calculating your anticipated retirement expenses to see what your monthly bills will entail. And you should also make sure you understand how much income your savings will give you each month.
You might look at your 401(k) balance and see that you’ve got $1.2 million in that account. And you might think to yourself, “Hey, I’m in great shape.”
But how much monthly income does $1.2 million give you? If you don’t know the answer, you can’t make a sound decision in the context of Social Security.
Let’s say you decide to use the 4% rule to manage your $1.2 million nest egg. That gives you $48,000 per year, or $4,000 per month.
Now, let’s say your anticipated monthly retirement expenses come to $5,000. And let’s say Social Security will pay you $2,000 at full retirement age.
In that situation, you may be just fine with claiming benefits early if there’s a good reason to do so. In a worst-case scenario, you’re looking at a 30% reduction by filing at 62, which still leaves you with $1,400 a month. Added to your 401(k) withdrawals, you’re covering your anticipated costs.
On the other hand, let’s say you expect to need $6,000 a month in retirement. That makes the case for filing on time to avoid a reduction. It also means, however, that you don’t necessarily need to push yourself to delay your Social Security claim past full retirement age.
The extra money might be nice to have. But it’s also not necessarily a need.
Have the right information before signing up
The last thing you want is to claim Social Security at the wrong time. So before you take benefits, assess your savings and understand what your nest egg means in terms of a monthly paycheck. Only then can you make an informed financial decision.
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