Key Points
Social Security may play an important role in your retirement finances.
Understanding the difference between different filing ages is key.
It's also crucial to recognize how much replacement income Social Security will give you.
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If you're planning to retire in 2027, you may be getting increasingly excited about wrapping up your career. At the same time, you may be getting increasingly anxious about the financial side of things.
After all, it's not easy to go from earning a steady paycheck to having to rely on a combination of savings and Social Security. It's important to understand the role those benefits might play in your retirement. With that in mind, here are three key things about Social Security that must be on your radar at this stage of the game.
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1. How much income your benefits will likely replace
Retirees are often told to aim to replace 70% to 80% of their former income to live comfortably. You don't necessarily need to replace 100% of what you used to earn, since you won't have to save for retirement while you're in retirement. But that 70% to 80% range is a pretty good benchmark if you want to mostly uphold the standard of living you're used to.
Social Security, meanwhile, will replace about 40% of your pre-retirement wages if you earn an average salary. If you're a higher earner, though, those benefits might replace a smaller percentage of your former wages.
Knowing that could help you determine if you've saved enough for retirement, or if you'll need to boost your IRA or 401(k) before you wrap up your career. It might also help you decide if there are certain expenses you may need to rethink once you're no longer earning a paycheck -- for example, keeping your current home versus downsizing.
2. What happens if you file early versus on time versus late
While your monthly Social Security benefits are calculated based on your personal earnings history, your filing age plays a role in how much money you get each month. If you file at full retirement age, which is 67 if you were born in 1960 or later, you'll get your Social Security checks based on your wage record without a reduction.
That said, you can claim Social Security at any point once you turn 62. Filing that early compared to waiting for full retirement age will reduce your monthly checks by about 30%. But the option is on the table if you want to exercise it.
In some cases, claiming Social Security early can be smart, such as if you have health issues and don't expect a long lifespan. In that case, starting those checks early could lead to a larger lifetime Social Security benefit.
There's also the option to delay Social Security past full retirement age for larger checks. Each year you wait, until you turn 70, boosts those benefits by 8%. Waiting on Social Security could make sense if you aren't confident you've saved enough for retirement, and you have strong health and a family history of longevity.
3. How cost-of-living adjustments hold up
Social Security benefits are eligible for an annual cost-of-living adjustment, or COLA. But those COLAs don't necessarily do a good job of helping retirees keep up with inflation, due to a flaw in how they're calculated.
If you want to maintain your buying power in retirement, it's best to have ample income outside of Social Security. In fact, it's important to invest in assets that can outpace inflation and/or pay you income steadily.
Before you retire and claim Social Security, assess your portfolio. Make sure a portion of it is invested for growth so you don't fall behind as costs rise through the years.
If you're expecting to retire next year, now's the time to learn more about how Social Security works. Understanding how much income your benefits might replace, when to file, and how COLAs work could help you prepare for the financial side of retirement more thoroughly.
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