by Sally Writes
Everyone who works a traditional job longs for the day of hanging up their uniform and clocking out for the final time. Retirement, however, is a calculated procedure that takes years of preparation and knowledge of the social security system. You don’t want to sign off on your day job too soon and run the risk of losing some of your benefits. At the same time, you may not have the energy to work until the age of 70. So how should you tailor your retirement plans around social security and what challenges can you avoid? Here are three of the most common mistakes that retirees make when factoring social security into their retirement plans.
1. Thinking Social Security Will Be Enough
The average amount that social security recipients receive is $1,365 per month, which equals about $16,380 annually. Such an amount may be sufficient if all of your debts are paid and if you reside in a part of the country that has a low cost of living. Retirees living in states like New York and much of California, however, may find themselves in a bind due to rent and mortgage rates easily exceeding $1,500 per month in these regions. Even with the maximum social security rate of $32,000 annually, which equates to $2,687, living in debt while collecting retirement benefits can be troubling. It is best, then, to set an age for retiring from the workforce and work towards building wealth that covers the shortfall of social security income. Life insurance coupled with personal savings is a good way to ensure that you and the family are financially sound throughout retirement. The ideal indemnity policy provides enough funding to cover all bills in the instance of death.
2. Collecting Benefits Too Soon
Everyone assumes that they are eligible for social security benefits on their 65th birthday. The truth is that collecting full benefits at the age of 65 is only applicable to individuals born in 1937 or earlier. Workers whose birthdates fall after 1960 will not receive all of their social security incentives if they retire at age 65 since the minimum age is 67-years-old to claim standard benefits for such persons. Retirees born between 1938 and 1959 will typically be eligible for full social security benefits at age 66.
3. Failing to Take Full Advantage of the Benefit Formula
The Social Security department uses a formula that determines how much a retiree is owed in monthly payments. The agency calculates the past 35 years of earnings and divides the amount by 420 to determine the category in which you fall. Consistent earnings of $70,000 annually, for example, will qualify for the maximum monthly payout. Those who earned $70,000 annually for the past five years but $0 in income before may not be eligible for the same amount of monthly social security payments. Such is the reason why it is best to work as many years possible when you have gaps in your employment. Every year worked pushes out the years of $0 income, which inevitably increases your social security earning potential.
It is always wise to discuss your retirement plans with your spouse if you are married. Deciding on a plan for leaving the workforce without sharing it with your partner could cause discord at home when you are trying to save for your withdrawal from the traditional job sector. Retiring with enough in the bank is the best way to live without financial worry.
This first appeared in The Havok Journal on June 3, 2018.