Many people think that buying a house is the biggest financial decision they will ever make (and they would almost be right), but there’s an even bigger crossroads that accounts for one-third of annual income received by those in retirement in the U.S: when to claim Social Security.
A recent report estimates that American retirees who claim at the wrong time will miss out on a total of $3.4 trillion (that’s trillion with a T) in benefits by the time they die.
This equals a whopping $111,000 on average PER PERSON in lost benefits.
The truth is that the age at which you claim Social Security can have a dramatic effect on the monthly benefit you (and/or your spouse if you’re married) will get for the rest of your life. By NOT optimizing your Social Security benefits, you can potentially miss out on building more wealth in your retirement years.
There are 3 critical steps to take first before claiming Social Security that will help avoid missteps that can cost you thousands in unclaimed benefits.
Socrates once said, “to know thyself is the beginning of wisdom.” By the time it’s time to retire, most people know themselves pretty well and what they want in life and in retirement, but most Baby Boomers still don’t have a clear idea for how they will take income from their savings. This failure to turn inward and see how much retirement will really cost, could result in costly mistakes.
The consensus is that you will need is 70%-80% of the income you had while working. This number can change depending on how you envision spending retirement. It’s good to ask yourself questions about what your lifestyle will look like. Are there luxury items you’ll finally have time for? New travel destinations you would like to explore? Hobbies you’re excited to finally make time for? All of these can increase your expenses beyond what you have budgeted.
With people now living longer that previous generations, healthcare has become more important than ever. In fact, 52% of people turning age 65 will need some type of long-term care services (which Medicare doesn’t cover) in their lifetime, and the average cost of care for Alzheimer’s is $730,000.
By having a clear picture of how you see yourself spending your retirement, as well as having hard conversations about how healthcare will play out can pay dividends in the long run. Anticipating costs will help you determine the how much you will actually need in income during retirement.
WRITE IT DOWN
Many Baby Boomers in the U.S. do not have a written plan for how, where, and when they will take income from various sources in retirement. A plan that takes into account all of your retirement savings (including your Social Security) and when you will begin taking income from each one is critical for actually accomplishing your plan.
Writing your goals down, whether with retirement or with New Year’s Resolutions, is proven to actually accomplish what you want to set out to do.
When it comes to New Year’s resolutions, 60 percent of people abandon their resolutions within 6 months, and 25 percent abandon them within 7 days.
A study on goal setting by Dr. Gail Matthews at the Dominican University in California that followed 270 participants found that you are 42 percent MORE LIKELY to achieve your goals if you write them down.
By writing your goals down, in this case your income goals and how much you are going to need, you will become much clearer on what (and when) things need to be done to reach those income goals. It forces you to strategize and ask the right questions during the entire process.
DELAY OR NOT TO DELAY…THAT IS THE QUESTION
Whether you are DIYer, or enlist the help of a financial professional, getting a customized Social Security report that lays out how to sync up your savings (i.e. 401(k)s, IRAs, 403(b)s) with your Social Security benefits can help keep your spending on track and make sure you don’t run out of money, which is currently the biggest fear for nearly half of Americans.
The earliest you are able to claim Social Security benefits is 62, but maybe you plan on continuing to work longer beyond that? The latest you can claim Social Security is age 70.
As of 2018, full retirement age (FRA) is considered to be 66 for those born between 1943 and 1954. If you were born in 1955, then you will add on two months to the FRA for every year through 1959. Born in 1960 or later? Your full retirement age is 67. For every year beyond FRA, you will receive delayed retirement credits. Those credits will continue to increase your monthly benefit until they stop at age 70.
Currently, only 4 percent of retirees make the decision to fully optimize their benefits for the greatest financial gain, and a stunning 57 percent of retirees would build more wealth if they waited until age 70 to take benefits.
Is waiting until age 70 the right choice? It depends. The income planning process can be complicated, but is worth close analysis if you want to get as much benefit as possible. A trustworthy financial professional can be an invaluable resource during the planning process by helping you create a written income plan that factors in your goals, health, longevity, retirement savings, and Social Security benefits that fit your situation so you can have the retirement you’ve always imagined.