If you think Social Security will provide a large portion of your retirement income, think again. In August, the average monthly Social Security retirement benefit was $1,840. That’s only about $22,000 over a year. Fortunately, if you have earned more than average over your working life, your benefits will be above average. There is, however, a limit. The maximum monthly benefit for those who will start collecting in 2023 after waiting until age 70 is $4,555, or about $54,660 per year.
However, relatively few of us will qualify for this $4,555 benefit. However, there are many ways to increase your benefits and, just as importantly, effective steps to take before retirement.
Eligibility for the maximum benefit of $4,555
Here’s what you need to do to qualify for this maximum benefit of $4,555:
- Work for at least 35 years – because the formula used to calculate your benefits is based on your earnings over the 35 years in which you earned the most (adjusted for inflation).
- Earn (at least) the maximum taxable income in each of those 35 years. That’s $160,200 for 2023 – and a tall order for most people.
- Delay receiving your benefits until age 70, because for every year beyond full retirement age (66 or 67 for most people) that you delay starting to collect your benefits, these will increase by around 8%.
You may now find that you are unlikely to qualify for the maximum benefit. You again can increase your future benefits. Delaying their collection is a powerful strategy. You can also try to earn more in your remaining working years, perhaps by taking on a side job for at least a few years. Working past 35 can also make a difference, because for each additional year of work, the Social Security Administration will exclude one of your lowest-earning years when determining your benefits.
Smart steps before retirement
It’s important to include Social Security in your retirement planning. But also plan beyond that to make sure you’re saving and investing enough. After all, you’ll probably need more sources of income in your later years than just Social Security. Here are seven smart steps you could take:
- Develop a solid retirement plan, determining how much income you’ll need in retirement and how you’ll get it. Sources of income may include dividends, annuities, rental income or pensions.
- Pay off any high-interest debt. Such debts, often incurred through credit cards, can be debilitating. It may not be easy, but most, if not all, of us can no longer have debt.
- Have an emergency fund that can sustain you for at least a few months, such as in the event of a job loss, health issue, or expensive car repair. This may not seem related to retirement, but not having an emergency fund when you need it can derail your retirement.
- Make good use of tax-advantaged retirement accounts such as IRAs and 401(k)s. Traditional versions give you upfront tax breaks, while Roth versions offer tax-free withdrawals in retirement. You can contribute up to a total of $6,500 to IRAs in 2023, plus an additional $1,000 if you’re 50 or older. Contribution limits for 401(k)s are more generous: $22,500 for 2023, plus $7,500 for those 50 and older. If your employer offers 401(k) matching funds, try to contribute enough to maximize the match, because it’s free money.
- Invest efficiently, which can be as simple as sticking to low-fee index funds. They can be powerful long-term wealth creators.
- Learn more about your personal finances because the more you save, the more money you will have to save and invest. At the very least, try to live below your means.
- Also consider consulting a financial advisor if all of this seems stressful or intimidating. A good advisor can put you on the right path to a comfortable retirement.
You may not like the idea of learning about Social Security and retirement planning, but the more you know, the more financial security you’ll have in the future. Decide to take some of the smart pre-retirement steps above soon.
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