Social Security might truly become a critical source of income for you once you retire. This especially holds true if you don’t have the largest nest egg.
As such, it’s important to make sure you’re claiming benefits at the right time. But if you can’t answer these important questions, it’s a sign that you ought to hold off on filing and dig more deeply into your personal finances.
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1. How much monthly income will I need as a retiree?
It’s important to have a good sense of what your living expenses will amount to in retirement. If you haven’t crunched those numbers yet, you’ll need to back up and wait on Social Security.
Determine how much money you’ll need for your essential expenses, like healthcare and housing, and how much you’ll need for things like leisure and entertainment. Once you have a specific number in mind, you can claim Social Security more strategically.
2. How much monthly income will my nest egg provide?
Ideally, you’ll be coming into retirement with some amount of money in savings. But before claiming Social Security, you’ll need to figure out how much monthly income your nest egg will give you.
Let’s say you have $300,000 in retirement savings and you decide that you’ll withdraw from that total at a rate of 4% per year. That means you’ll have $12,000 of annual income, or $1,000 a month. Once you have that number, you can compare it to your estimated monthly spending to see how much income you need to get from Social Security to make your lifestyle work.
Of course, you may want to opt for a more conservative withdrawal rate than 4%, which will change these numbers. Think about how long you think your savings will need to last, as that could help you land on the ideal withdrawal rate. You may also want to consult a financial advisor to get their input.
3. How’s my health?
If your health isn’t great going into retirement, you might spend more money than the typical senior on medical costs. And so a larger Social Security benefit, which you can snag by delaying your filing, might make it easier to cover those bills.
That said, people in poor health are often advised to claim Social Security on the early side. The logic is that if you’re less likely to live a longer life, you might get more total income out of the program by filing sooner rather than later.
This is really a tricky situation that could go either way, as it’s easy to make the case for an early Social Security filing or a late one. You’ll need to think about the pros and cons of filing at different ages in light of your health status.
Your Social Security filing age will dictate how much monthly income you’re able to receive in retirement. So it’s important to think through that decision very carefully. And you should absolutely address these key questions before moving forward with a Social Security claim.
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