Millions of seniors collect Social Security in retirement, and the more you know about the program, the more money you stand to receive from it. Here are a few important rules you must understand.
1. The higher your earnings, the higher your benefits
You calculate your Social Security benefits by taking your average monthly earnings over your 35 highest-paid years in the workforce, adjusting them for inflation, and applying a special formula to that total. The more money you earn during your career, the bigger the paycheck you'll get from Social Security in retirement, so go after raises and promotions to the best of your ability.
Also, try to work a full 35 years, because if you don't, you'll have $0 factored into your benefits equation for each year you don't have an income on file. If you're missing a year or two of work within that 35-year threshold as retirement nears, extend your career a bit to avoid a lower retirement benefit.
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2. The age you claim benefits at matters
Though your Social Security benefits are earnings based, you're not entitled to your full monthly benefit until you reach full retirement age, or FRA. That age is either 66, 67, or 66 and some number of months, depending on the year you were born.
However, you don't have to claim benefits at FRA. The Social Security Administration (SSA) lets you sign up for them as early as age 62. But for each month you take benefits early, they'll be reduced by a certain percentage. File at 62 with an FRA of 67, and you're looking at a lifelong reduction of 30%.
On the flip side, you can delay benefits past FRA, and for each year you do, you'll boost your monthly payments by 8% up until age 70, at which point that incentive expires. Though the SSA won't force you to file for benefits at 70, that's generally considered the latest age to sign up, since there's no financial upside to waiting any longer.
Whether you decide to claim benefits early, late, or on time will depend on your specific goals and circumstances. Just know that the age you file at will dictate what your monthly payout looks like for life.
3. You get a do-over if you file too early
Many seniors jump the gun and sign up for Social Security at the earliest possible age of 62, thereby reducing their monthly benefits substantially. If you do the same but regret that decision afterward, there's good news: The SSA allows each filer one do-over on claiming benefits, but you need to act quickly to capitalize on it.
If you withdraw your benefits application within a year and also repay the SSA all the money it paid you within that time period, you'll get the option to file for benefits later, thereby potentially avoiding a lifelong reduction in those monthly payments. But paying back those benefits is easier said than done, which is why typically, the monthly payment seniors start out collecting from Social Security is the same benefit they wind up with permanently.
4. Your benefits won't be enough to live on
Many people neglect their retirement savings because they assume they'll get by on Social Security alone once they stop working. In reality, those benefits will replace only about 40% of your preretirement income, assuming you're an average earner. Most seniors, however, need a good 70% to 80% of their former income to keep up with their expenses, especially when we factor in the high cost of healthcare during retirement. So planning to live on Social Security without other income is not a good idea.
If you've yet to start building a nest egg, start making 401(k) or IRA contributions immediately. Socking away $300 a month over a 20-year period will leave you with close to $150,000 in retirement savings, assuming you invest that money at an average annual 7% return (a reasonable return for a stock-heavy investment portfolio). Make it $500 a month over 20 years, and you'll be sitting on close to $250,000, assuming that same 7% return.
Educating yourself on Social Security is one of the smartest ways to prepare for retirement. Read up on these and other rules so you're able to maximize your benefits once your career comes to an end.
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