On paper, Social Security looks pretty straightforward. You pay taxes to support it throughout your career, and once you retire you receive a monthly check that’s largely based on how much you’ve paid to the program.
In practice, it is a little more complicated. The number of years you have worked, the amount of your salary and the age you are when you start collecting all play a role in determining the final size of your Social Security benefit check. Because of these rules, your benefits can vary significantly from your neighbor’s, even though you both earned roughly the same total in your lifetime.
It also means that you can have an impact on your monthly benefit level even if you are closer to the end of your career than to the start of it. With that in mind, here’s how to take 24% more out of Social Security each month.
The time-money compromise
The basic strategy for getting that extra 24% is to wait until you are 70 to start claiming your benefits. By simply waiting for that point, your monthly benefit will be 24% higher than if you had started collecting at your full retirement age (which is 67 for people born in 1960 or later).
You will face a compromise, of course. By choosing to defer until age 70, you will receive benefits for as many months less. In fact, you can start receiving your social security retirement benefits from the age of 62. This means that there are eight years of (reduced) benefit checks that you will forgo in order to collect your highest possible monthly Social Security payment.
For this to work, you need to have a source of money that will last you until the age of 70. If you can continue to work, it is a source of money. Otherwise, if you have a pension, savings, deferred compensation, or the proceeds from the sale of your own small business, you may be able to help yourself until you start collecting Social Security.
In addition to this immediate financial need, you will need to consider both your remaining life expectancy and your overall health when determining when to start your Social Security benefit. If you don’t expect to live well beyond 70, you are probably better off collecting sooner and enjoying the money while you can.
Also, since the crossover point where your lifetime profit is most important in the meantime is between the late 70s and early 80s, think about what you will use the money for at this point. of life. Many retirees slow down their spending as they age. As a result, you may find that you will have more use in accessing your Social Security money early than in getting a larger lifetime total benefit while waiting.
Start planning now for a better retirement
This time-to-money trade-off is one of the main reasons it’s important to plan ahead before claiming your Social Security benefit. Another reason is the fact that at best Social Security is designed to replace only about 40% of the annual income of a typical retiree – let alone for those with higher incomes. If that’s not enough to cover your planned retirement expenses, you’ll need another source of money to live the lifestyle you want.
A guideline known as the 4% rule can serve as a reasonable starting point when it comes to setting a goal of how much you’ll need to save to generate that cash flow. Based on this guideline, if you keep a diversified portfolio, you can spend 4% of the initial value of that portfolio in the first year of your retirement and adjust your withdrawals for inflation each year. By following this strategy, you have a very good chance that your money will last at least as long as your retirement.
With this guideline in mind, for every $ 1 in annual fees that you need to cover from your portfolio, you will want to have $ 25 invested when you retire. So if you think you need $ 1,000 a month – $ 12,000 a year – on top of what Social Security will cover, you’ll need a wallet worth $ 300,000 to make it work. .
It takes time to build that kind of nest egg, and the sooner you start, the better your chances of reaching your goal in time for your retirement. So start now and use both this 24% increase in your Social Security benefit and your improved nest egg as key tools to help your golden years be that much more financially secure.