By
Christine Fahlund on
August 13, 2010
Usually, you need to plan for your income
in retirement to support you for 30 years.
That is a very long time, especially
considering the potential effect of
inflation over such an extended span. That's
why it is important before you retire to
evaluate and understand each source of
income you will have available to you and
how you can maximize its potential benefits.
At T. Rowe Price, our general rule of thumb
is that you will need to replace
approximately 75% of your salary once you
retire—with about 50% from savings, 20%
from Social Security, and 5% from a pension
or a part-time job.
Social Security Options
Social Security may provide more
opportunities for inflation-adjusted income
in retirement than you had realized. For
that reason, it is important that you review
your options carefully before filing for
your Social Security benefits. Generally
speaking, eligibility for Social Security
benefits starts when you are age 62 but can
be delayed until as late as age 70. The
primary benefit of waiting is that for the
rest of your retirement you will receive
larger annual (inflation-adjusted) benefits
than if you begin taking payments early. For
the majority of preretirees, delaying at
least until you reach your full retirement
age (FRA)—which is 66 for most baby
boomers—is a wise decision. However, there
are factors that could affect your
retirement income stream. For example:
- Retiring early—If you are
single and have health issues that may
shorten your life expectancy, you may
choose to retire earlier than your peers
and begin taking Social Security
benefits as early as age 62.
- Continued employment—If you
are working, during the years you remain
fully or partially employed, delay
taking benefits until at least age 66
and possibly to age 70—or until you
have ceased working entirely. Your
employer's payroll and benefits program
will help cover expenses during that
time, and your retirement investments
could continue to compound.
- Married couples—If you are
married, it may be advisable for you and
your spouse to delay taking Social
Security—or one of you to begin taking
it at an early age and the other to wait
until as late as age 70. The most
important guideline is to understand
that when the first spouse dies, the
surviving spouse is eligible to receive
the larger of the two spouses' Social
Security benefits, but not both.
Therefore, in most cases, it makes sense
for the higher-wage-earning spouse to
delay taking his or her Social Security
benefits as long as possible—up to age
70.
Looking Ahead
As you near retirement, obtain estimates
of your expected income from Social
Security, using the estimator tool at ssa.gov/estimator.
You can get estimates of benefits based on
many different starting ages. After you have
an idea of what your monthly benefits might
be at each possible starting age, decide
when it will be most appropriate for you (or
you and your spouse) to begin taking
benefits. Then meet with a representative of
the Social Security Administration or a
financial advisor who has an in-depth
knowledge of Social Security to discuss your
options and decide on a plan.
It is best to assume that you will enjoy a
long life—one that will require a
long-lasting source of income that adjusts
for inflation. While it may be tempting to
rely on Social Security for immediate cash
flow, few strategies can do more to
enhance your long-term financial security
in retirement than delaying the payout of
your Social Security benefits.
