Once you retire, you can not expect your expenses to drop dramatically. As a rough general rule, you should expect your consumption to account for about 75% of your pre-retirement consumption, without taking into account major lifestyle changes.
This means you can become heavily addicted Social Security when leaving the workforce. And that’s why you can not afford to buy into these glaring misconceptions.
1. Your benefits replace your entire paycheck
If you are an average employee, you can expect your monthly social security check to replace about 40% of your early retirement income. If you are a higher income earner, you can expect an even smaller percentage of replacement income since Social Security has one maximum monthly benefit it pays off.
If your plan is to retire on social security alone, you may end up struggling financially when you realize how expensive your senior years will end up being. And so instead of going that route, it makes sense to build independent savings to supplement your benefits. It could mean consistent funding of one 401 (k) plan if your employer offers one, or socking money away in an IRA.
2. Your application age does not matter
The earliest age you can sign up for social security is 62 years. But you are not entitled to your full monthly benefit until you reach full retirement age (FROM).
FROM does not start until the age of 66, 67 or somewhere in between, depending on your year of birth. And for each month you apply for benefits before OFF, they will be reduced, the extent of which depends on how early you apply.
Now you can also delay your application for social security past FRA, and this is a step you may want to consider if you retire without a lot of money in savings. For every year you delay your application beyond OFF, your benefits increase by 8% until you turn 70 years old.
No matter what application age you end up landing on, you need to know that it actually matters when you sign up for benefits. And that’s why it’s important to think about that decision.
3. Submission early will only cause a temporary hit for your services
We just learned that applying for Social Security before OFF will cause your benefits to shrink. You may have been led to assume that when you reach OFF, your monthly benefits will be restored to their full amount. But that’s not how things work.
When you first apply for Social Security early, the benefit you lock in is the amount you would normally receive for life, without taking into account the annual cost of living adjustments to which the benefits are subject. Now, in some cases, you may be able to avoid a permanent reduction in your benefits by withdrawing your Social Security claim within 12 months and repaying the money you received in benefits within that time frame. However, as it is not an easy thing to do, applying for benefits early can mean cutting them permanently.
Get the right information
Knowing the ins and outs of social security can help you avoid mistakes in claiming benefits and planning for retirement. Keep these key points in mind to avoid a world of regret later in life.