You’ve been paying your Social Security taxes for decades, and it’s finally time to recoup that investment. Before you dive in and file that Social Security application, though, it’s smart to review your retirement plan and verify that claiming now is truly the right strategy. Here are four steps you can take that’ll provide the insight you need.
1. Estimate your lifespan
You can find a variety of lifespan calculators online. Choose one that considers lifestyle factors, like whether or not you smoke, how much you exercise, and the amount of alcohol you consume. You can also temper the calculator’s output with your own knowledge of your family history. If your relatives tend to stick around until their late 90s, it’s more likely you will too.
Your projected lifespan doesn’t affect your Social Security benefit directly, but it does affect your retirement savings. If three lifespan calculators and your family tree all indicate that you might celebrate a centennial birthday, you should crunch the numbers to see if your savings will last that long too.
The longevity of your savings is a function of how it’s invested and how much you withdraw each year. Assuming 50% to 70% of your retirement portfolio is deployed in stock, the generally accepted “safe” withdrawal rate is 4% of your balance annually — but that assumes you need your money to last 30 years. Use a lower withdrawal rate, say 3% or 3.5%, if you expect to live 35 or 40 years past your retirement date.
If that withdrawal rate doesn’t produce the kind of income you need, you could wait to file for Social Security. That reduces the pressure on your savings in a couple of ways. First, your Social Security benefit increases the longer you wait to file your claim. And second, an extra year of work means an extra year of retirement contributions to shore up your savings.
2. Make a budget
Now’s the time, too, to create your retirement budget. Don’t assume that some prescribed percentage of your working salary, like 80%, is all you’ll need after you leave the workforce.
Start by writing down your current monthly, quarterly, and annual living expenses in detail. Then adjust for items that go away in retirement, like 401(k) contributions, and add in new expenses, like Medicare premiums and copays. Don’t forget to account for your income taxes in retirement as well.
Once you have a realistic picture of your retirement living expenses, compare your total income needs with amounts available from your savings and Social Security. If there’s a shortfall, you have two options: Trim away some expenses or hold off claiming Social Security until your benefit is higher. The right strategy is often a combination of both, but step three below can add some clarity.
3. Project your benefit
The rules that govern how your benefit increases by claiming later in life aren’t exactly straightforward. They hinge on what’s called Full Retirement Age or FRA. Your FRA depends on your birth year, but it’s between ages 66 and 67. When you reach FRA, you qualify for your full Social Security benefit. Prior to FRA and as early as age 62, you can still get Social Security, but the benefit is adjusted downward. After FRA, your benefit is increased by up to 8% for each year you delay claiming, until you reach age 70.
Fortunately, you don’t have to know the ins and outs of these formulas. What you can do is create a personal account at my Social Security. Once you log in, you’ll see your benefits estimates for claiming at 62, FRA, and 70. You can input specific retirement ages and adjust your future annual salary to see how it changes your expected benefits. That’s a handy feature, particularly once you’ve already built your retirement budget. At that point, you have a good idea of the income you’ll need, and the Social Security estimator can show you how to make it happen — either by delaying your claim or by increasing your future working income.
4. Plan your lifestyle
Your finances may be your top retirement concern, but there’s a related question of how you’ll spend your time. Boredom is a very real problem for retirees, and it can have financial consequences. You might spend beyond your budget in search of entertainment, for example. Or, you might decide you want to go back to work.
Know that if you claim Social Security before you reach FRA, your working income could reduce your Social Security benefit temporarily. In the years before you reach FRA, your benefit is trimmed by $1 for every $2 you earn above an annual limit. In 2020, that limit is $18,240. In the year you reach FRA, your benefit is reduced by $1 for every $3 you earn above a different, much higher limit. That limit this year is $48,600. Once you reach FRA, your working income no longer affects your benefit.
Make a list of activities you’ll pursue in retirement and account for any associated costs in your budget. If you think you might keep working in any capacity, it may make sense to delay your claim until you reach FRA. That way, you can earn without seeing a reduction in your Social Security income.
You can change your mind
Even the most meticulous planning can’t account for surprise circumstances — like your former boss unexpectedly offering you an incredible job opportunity after you filed for Social Security. Thankfully, you have options if that happens. You can withdraw your Social Security application within 12 months of claiming and repay the benefits you received. Alternatively, if you are between FRA and 70, you can suspend your benefit payments temporarily.
Timing your Social Security claim properly is part art, part science. Your eagerness to jump into retirement is an important factor, but also consider your savings balance, your income needs, and your lifestyle needs.