Americans rely on Social Security, and it's important to make the most of the program. Do you understand how the age at which you file will affect your monthly benefits? You can file for Social Security retirement benefits as early as age 62 or as late as age 70, and the timing of when you file has a big impact on your monthly benefits. So if you claim 36 months early, you'll lose 20% of your full retirement benefit. Note, though, that delayed-retirement credits only apply to Social Security benefits that are based on your own work record -- not to spousal benefits you may be eligible for. The most important is that you can't claim spousal benefits until your spouse files for retirement benefits. If both spouses have worked, you can always file for your own benefits. Will you lose Social Security benefits if you claim now? First, if you claim before full retirement age and still have a job, then you can lose benefits if you earn too much money. Nevertheless, if you decide later that you would have been better off not filing as early as you did, then the SSA-521 provision can be useful.
Whether you’re just starting out or are well into your career, you may wonder: Are my retirement savings on track?
An online calculator may help, provided you find one that makes reasonable assumptions about the amount you plan to spend in retirement and takes key factors, including inflation and taxes, into account. But if you want to avoid having to read the fine print to assess those assumptions—not to mention the sales pitches often embedded in these tools—there are several low-tech methods that can help.
Why bother tracking your progress? With regular checkups, you can avoid the potential for a nasty surprise as retirement looms. Moreover, according to psychological research conducted on students at the University of Waterloo in Ontario, those prompted to monitor their savings progress are more successful.
As with any generalized guidance, it’s important to understand the pros and cons of each method and adapt it to your own situation.
When financial planners assess whether clients are on track to reach retirement goals, they generally use software that’s not available to the public.
But with some relatively simple math, you can get a sense for what they do, says Michael Kitces, partner and director of wealth management at Pinnacle Advisory Group Inc. in Columbia, Md.
The first step is to estimate the amount you want to spend in retirement. If you have no clue, use the 80% rule of thumb. It assumes that retirees can get by on about 80% of what they earned before retiring because they no longer need to commute or save for retirement and frequently wind up in a lower tax bracket. Using the rule, a couple with a $100,000 annual income would need an annual retirement income of $80,000.
The next step is to deduct from that $80,000 the couple’s expected Social Security and pension benefits. If they are entitled to $35,000 a year in Social Security, for example, they would need savings to supply the remaining $45,000.
Mr. Kitces suggests multiplying that number—$45,000 in this case—by 25. The result—or $1.125 million—is the amount the couple would have to save to be able to withdraw $45,000 a year without violating the 4% “safe” withdrawal rate that historically has ensured retirees a high probability of never running out of money.
If the couple has saved $560,000, they are about halfway to their $1.125 million goal. But assuming both partners are 50 years old, are they on track?
Here, another rule of thumb can help. Known as the Rule of 72, it calls for dividing 72 by the rate of return the couple’s investments can reasonably be expected to earn. The result is the number…