Assuming you intend to retire at age 67, aim to accumulate savings equal to 8 to 10 times your annual salary. Together with Social Security benefits, that should be enough to replace about 85% of your pre-retirement income. If you have other sources of income — such as a traditional pension or a part-time job — or if you plan to significantly reduce your spending in retirement, you can get by with saving less.
About 44% of workers take the benefit as soon as they are eligible, at age 62, and nearly 75% of retirees take benefits before full retirement age. It’s the big decision every retiree needs to make: Should you claim Social Security benefits early, at your full retirement age (currently 66, for workers born between 1943 and 1954) . . . or delay claiming until as late as age 70? If you take benefits as early as possible, you’ll see about 25% to 30% less each month than you’d get at full retirement age. If you wait, you’ll receive 8% more benefits for every year beyond your full retirement age.
Once you stop working, you won’t be paying payroll taxes or socking away income for retirement savings. Other expenses, everything from commuting to dry cleaning costs, may go down or disappear. You may even save money on food, because you’ll have more time to compare prices in the grocery aisles and to prepare meals at home. Retirement planners generally recommend saving enough to cover 70% to 85% of your pre-retirement income, but you’ll have to calculate your own retirement income and expenses to come up with a formula that’s right for you.
Quite the opposite. Whether you take benefits early or wait until 70, you’ll end up with the same dollar amount before you die, assuming you die at your projected life expectancy (as determined by Social Security actuaries). Thus, if you claim benefits at 62, the earliest you are eligible, you’ll receive a 25% to 30% reduction to account for the actuarial reality that you’ll be receiving benefits for a longer stretch of time. If your full retirement age is 66 but you wait until 70, your benefit will be 32% higher because, actuarially, you’ll be collecting over a shorter period. Of course, if you die before you reach your projected life expectancy, you’ll collect a lower total payout either way, but if you delay claiming until 70 and live well beyond your life expectancy, the wait will be more than worthwhile.
Within 12 months of first claiming your benefit, you can withdraw your application by filing Form SSA-521. You’ll need to repay all of the money you received, including any spousal benefits. You can then restart benefits in later years, for a bigger amount.
Given today’s longer life spans (a 65-year-old man can expect to live another 18 years, on average; a 65-year-old woman can expect to live another 20), you’ll need to invest for growth well into retirement — starting with a mix of, say, 50% stocks and 50% bonds and gradually adjusting it to become more conservative as you age.
Social Security may eventually fall short of the money it needs to deliver full benefits, but it’s not likely to go broke altogether. Here’s the deal: Social Security is mostly funded by payroll taxes and taxes on Social Security benefits. In recent years, those revenues have not been enough to cover full benefits, so the system has used interest on its reserves to cover the gap. The reserves are projected to run out in 2034, at which point tax revenue will generate enough to cover only 77 cents for every dollar of scheduled benefits. Chances are strong that Congress will come up with a way to fix the system before that happens, but, even in a worst-case scenario, you would still receive more than three-fourths of your benefit.
Medicare doesn’t cover everything — far from it. Recent estimates for total retirement health costs range from $245,000 to $264,000 for a couple who are each 65 and live to their average life expectancies — 82 for a man and 85 for a woman. The good news for retirement savers: Those costs are baked in to formulas for how much you need to save for retirement — say, eight times your final salary. Just be sure to keep those costs in mind as you plan how to spend your nest egg.
You may not be able to stay on the job even if you want to. Health problems are the biggest reason people find themselves retiring ahead of schedule, according to the Center for Retirement Research at Boston College, followed by involuntary job loss. Older workers generally have more trouble finding work after a layoff than younger workers. Changes in family circumstances also play a role in retiring sooner rather than later. If your spouse retires before you do or a parent moves into your home, the chances increase that you’ll leave the work force before your scheduled departure.
According to this rule, you can safely take 4% of your total portfolio in the first year of retirement and the same amount, adjusted for inflation, every year afterward. But the rule, based on an analysis of returns over a series of 30-year periods starting in 1926, doesn’t reflect current and future conditions. Entering retirement in a bear market and taking 4% from your nest egg could cripple your portfolio. Rather than follow the rule blindly, consider lowering the percentage or skipping the inflation adjustment in years when the market performs poorly. On the flip side, you might want to increase the percentage of your withdrawal when the good times roll.