The average American spends 45 years or 90,000 hours working. She typically spends about half that time -- 20 years or more -- retired. Yet, planning for retirement is often overlooked or put off until it’s too late to adequately prepare.
How ready for retirement are you? Have you calculated what you’ll need to live on in inflation adjusted dollars? And do you have a plan to maximize Social Security benefits?
Many people don’t realize what a dramatic impact Social Security can make on their retirement income and how critical benefit timing decisions are. For instance, a baby boomer born in 1946 with maximum Social Security earnings would receive more than $1.5 million in inflation-adjusted benefits over a 30-year retirement period if she waited to take benefits until the age of 66, her full retirement age.
Despite fears that the Social Security System will collapse in a few decades, the 2012 Trustees Report points out that the program will still be able to pay out 75 percent of its benefits in the unlikely event the underlying trust fund is drained.The temptation to take benefits early
Social Security is really a lifetime annuity with annual cost-of-living adjustments. With the power of compounding, these annual bumps can really add up over the years.
Taking Social Security as early as possible is tempting. However, the later Social Security is claimed, the higher the monthly benefit will be. As with other temptations, it’s a trade-off, but in the case of Social Security, claiming retirement benefits at 62 can be a costly decision for you and family survivors.
How much of a trade-off? Waiting to collect benefits until your full retirement age increases your benefit by one third and waiting until your maximum retirement age doubles your benefit.Strategies for maximizing benefits
For each year you delay (to maximum age 70), you receive up to 8 percent more in delayed credits towards your monthly benefit in addition to the annual cost-of-living adjustment. Social Security is a safety net at age 62 if you’re in poor health or unemployed, but if you can wait, you have a number of options.
The most valuable strategies involving Social Security are only available if benefits are claimed at Full Retirement Age (FRA) or later. And there are yet more strategies to maximize long-term benefits for couples, survivors and divorced individuals.Maximizing benefits for married couples
Couples are in a unique situation when it comes to Social Security planning because they have several advantages over their single peers which can significantly increase lifetime benefits. If you are in good health at retirement, one of you has a 40 percent chance of living into your 90s so it’s important to consider benefit options when claiming, especially the spousal benefit.The 'file and suspend' strategy
One claiming strategy called "file and suspend” allows you to claim Social Security at your FRA, but suspend actual payments until a later date. This technique is especially useful if your benefits are higher than your spouse’s because you’re older or a higher income earner, and you’re not ready to retire, but your spouse is.
For example, a husband plans to delay his benefit until age 70 but his wife wants to retire. He claims his benefit at his normal retirement age -- say it’s 66 -- but then immediately suspends it.