Are you thinking of claiming Social Security? If so, you should be aware that your decision to file at a specific time can affect the amount of your checks for the rest of your life. It can also be very difficult to undo your claim if it turns out you made a mistake.
With these thoughts in mind, be sure to check for these four signs that you're ready to start getting your checks.
1. You've coordinated with your spouse
Claiming Social Security as a married couple is a lot more challenging because there are many different strategies you could use to maximize combined benefits.
In most cases, the higher earner should delay claiming benefits as long as possible to max out the income available to the couple (and eventually the longer-living spouse). However, there are some other considerations, including the fact that your partner can't claim spousal benefits on your work record until you've started your own benefits.
To make sure you're getting the largest combined benefit and providing appropriately for whichever spouse lives longer, work with your partner to decide what makes sense. If you've done that, you've hopefully found an optimal strategy and should be ready to put it into play.
2. You've worked for at least 35 years
Social Security's benefits formula gives you a percentage of your average wages, after adjusting them for inflation, but it takes exactly 35 years of earnings into account when calculating your average -- specifically, your highest-earning years. Unfortunately, those who don't have full 35-year work histories will still have their average wages determined based on this timeline. Making sure you've put in at least 35 years helps you avoid having your benefits reduced by the inclusion of years of $0 wages.
In some cases, you'll actually want to work even longer. If you had some low-earning years included in your 35 -- perhaps at the start of your career, or if you switched jobs and took a pay cut -- you may want to make sure those years aren't included by working a few extra ones now to push them out.
But if you've got 35 years of good earnings you're happy to have included in your average wage, you're well on your way to being ready to file for your benefits.
3. You understand what "full retirement age" is and how it affects your benefits
The Social Security benefits formula determines your primary insurance amount (PIA), while the age when you actually get your PIA is called your full retirement age. Depending on when you were born, it's between 66 and 67.
Those who claim benefits prior to their FRA are subject to an early-filing penalty that reduces benefits for each month early they are. Those who delay until after their FRA are entitled to an increase in benefits from delayed retirement credits (which are also applied based on the number of months the person waits to file). Early-filing penalties shrink the size of your check by 6.7% annually for each of the first three years. The reduction in benefits is an additional 5% for each year before that. Delayed retirement credits, on the other hand, give your benefit an 8% annual boost.
It's important to understand how much filing even a month early can affect your benefit, as well as to assess how much delayed retirement credits could be worth. If you've done the calculations, you're well-positioned to decide if you're really ready to claim Social Security.
4. You have other sources of income to supplement your Social Security checks
Finally, the last key test is whether you have enough other income to live on.
Social Security is meant to be one of several sources of retirement funds, so it's not enough to cover costs on its own. While most experts recommend replacing about 70% to 90% of your pre-retirement salary (or more), your Social Security benefits will only replace about 40%. Unless you've got a nest egg to provide the rest, you aren't ready to claim your benefits.
But if you've got a large retirement account balance, you've worked out an estimated budget, and you know your Social Security checks and retirement account distributions can cover you, it may be time to get your benefits claim under way.
Are you ready to start your benefits?
Your choice about when to claim Social Security benefits can shape your financial situation for the entirety of retirement.
Make sure you look for these signs you're ready to claim your benefits. If you haven't yet talked to your spouse, you don't understand how the benefits formula works, or you're planning to over-rely on your Social Security checks, you may want to pause before acting to ensure you're truly ready.