Answering these questions will help you understand your financial situation as you retire. Many people’s retirement finances are heavily reliant on Social Security. Whether Social Security will provide all, most, or only a portion of your retirement income, it’s critical to understand what you’re getting so that you can be as prepared as possible.
You should ask yourself four questions before filing for Social Security benefits in 2023.
Is my claim for benefits early, on time, or late?
Your full retirement age (FRA) in Social Security refers to the age at which you are eligible to receive your full benefit, and it is based on your birth year and serves as your starting point.
Although your FRA is the determining factor, 62 to 70 are the earliest and latest ages to start collecting benefits. When you begin receiving benefits before your FRA, they will be reduced by five-ninths of 1% if you are within 36 months of your FRA and five-twelfths of 1% each month after that.
Your benefits will increase by two-thirds of a percentage point each month you delay them past your FRA. You can postpone them until 70; going beyond this age will not increase them further, so there is no real need. Want to know more about FRA?
How much money will you require in retirement?
You don’t want to enter retirement unaware of your expenses, especially if your retirement lifestyle differs from your current lifestyle. In case you don’t know where to start, the 80% rule of thumb states that you should aim to save 80% of your last working year’s income. You should aim for $80,000 annually in retirement if you earn $100,000 the year before retiring.
The 80% rule is merely a starting point that can be tailored to your specific circumstances. You might want to increase your retirement savings if you know you’ll increase your expenses (for example, by traveling more). You can subtract from your lifestyle if you’re downsizing.
How much will you be paid?
You can find out how much your monthly benefits will be by accessing your earnings record on the Social Security website (SSA.gov). Create an account first. Your projected Social Security monthly benefit should appear once your account has been established.
A large portion of what determines your benefit is your earnings over your career (and your Social Security taxes), so you’ll want to double-check this not only to get an idea of your benefit but also to ensure there are no errors in your earnings record. It is uncommon, but it does occur.
Underreporting your earnings can result in unexpectedly reduced benefits. Submit a Request for Correction of Earnings Record form to Social Security along with proof if you find an error.
Will you be able to work while receiving benefits?
Many people choose to work while receiving Social Security benefits, even if they don’t need the money. You don’t have to stop working just because you start receiving Social Security benefits; you just need to track how much you make because it could reduce your monthly use.
If you begin receiving benefits before your FRA and earn more than a certain amount, Social Security will apply a retirement earnings test (RET). If you have not reached your FRA and begin receiving benefits in 2023, your annual earnings limit is $21,240. Up until your FRA in 2023, if you are at your full retirement age this year, you can earn a maximum of $56,520.
Once you reach your FRA, the difference between your monthly benefit and the RET is added.
Let’s say you earned more than the allowable amount when you reached your FRA age of 67 and decided to take benefits at 64. If the RET reduced your yearly benefits by $5,000, Social Security would have withheld $15,000 from your benefits over the next three years until you reach the age of 67. When you reach the age of 67, Social Security will recalculate your monthly payments, gradually increasing them until you receive your entire $15,000 benefit.
You shouldn’t worry about working in retirement as long as you understand the implications.