Before claiming Social Security, it’s imperative you understand some key issues, including how far Social Security will actually go in providing you with necessary retirement income.
Before you claim Social Security, it’s important to make sure you understand how the benefits program works. Otherwise, you could end up with a financial shortfall and serious regrets.
To make sure you’re ready to get your retirement checks started, ask yourself these three questions first before you even consider filing a claim with the Social Security Administration.
1. How big of a role will Social Security play in supporting you?
The first and most important thing you must ask is how far your retirement benefits are actually going to go in terms of meeting your needs as a retiree.
When you stop working for good, you’ll typically need to replace a minimum of 70% to 80% of what you were earning before leaving the workforce. You may need even more money coming in if you intend to indulge in expensive hobbies (like traveling), if you experience significant health issues, or if you move to a higher cost-of-living area (say, to be near family).
Social Security isn’t going to provide the amount of replacement income you need. In general, your benefits replace only around 40% of pre-retirement income. You absolutely cannot afford to see such a drastic cut to the income you’re bringing into your household and still maintain anything close to your previous standard of living.
So be sure you understand the realities of exactly how far Social Security will go and that you have a plan to get the rest of the income you need from other sources (like a 401(k) or IRA). You can see an estimate of what your benefit will be at mySocialSecurity and compare that to your budget to determine how much extra money you’ll need.
2. Are you allowed to earn other income while collecting Social Security?
If you’re hoping to claim Social Security and also do some paid work as a senior (perhaps because you don’t have enough savings to provide the rest of your support and want the money to come from a part-time job), you should make sure you ask how working can impact your retirement checks.
If you have already reached your full retirement age when you claim Social Security benefits, this is not a point of concern. You can work as much as you would like after hitting FRA and still get all of the promised benefits.
But if you are younger than FRA, earning too much results in a reduction in benefits. Entire checks can be withheld to account for the amount you aren’t able to receive when your earnings get too high. If you won’t hit FRA for the whole year, you will see a loss of $1 in Social Security benefits for every $2 earned above $21,240. If you will hit FRA at some time during the year, you’ll lose $1 for every $3 earned after your earnings reach $56,520.
When you miss out on Social Security benefits due to working, this will result in a recalculation of benefits and a higher check starting at full retirement age. The problem is, this could be years away. In the meantime, not being able to double dip and get both Social Security and a big paycheck could create serious financial problems if this was your plan. So be sure you understand this rule before starting your retirement checks.
3. Will you be getting your standard benefit, or a larger or smaller amount?
Finally, you have to think about whether your age when you first get your check will entitle you to receive your standard benefit, a reduced benefit, or an increased benefit.
Your standard benefit is available if you claim benefits at your designated full retirement age. For any month you claim before that, you’ll face a reduction in your monthly payment. And for any month you claim after FRA until age 70, you will earn an increased monthly benefit.
If you want to get the highest Social Security checks possible, you should put off claiming as long as possible until 70. If you want more checks over your life and are OK with them being smaller, then claim early. The important thing is to think about which of these options makes sense given your financial goals.
By answering these three questions, you can ensure you actually are ready to make a Social Security claim so you can make an informed choice about one of your most important retirement income sources.