Social Security

Social Security is a government program designed to provide financial assistance to individuals during retirement, in the event of disability, or to dependents of deceased workers. The program is funded through payroll taxes under the Federal Insurance Contributions Act (FICA). For example, in 2023, the average monthly benefit for retirees is approximately $1,827, which can significantly supplement personal savings and pensions, especially considering that many retirees rely on Social Security for about 40% of their total income.

A common misconception is that Social Security will cover all living expenses in retirement. In reality, the benefits may not be enough to maintain your pre-retirement lifestyle. For instance, if you expect to need $4,000 a month in retirement, relying solely on Social Security could leave you with a gap of more than $2,000 each month. Therefore, it’s crucial to have additional savings or income sources, such as a 401(k) or IRA, to fill this gap.

Another mistake is not understanding the best time to claim benefits. You can start receiving Social Security as early as age 62, but your monthly benefit will be reduced if you claim early. For example, if your full retirement age is 67 and you start at 62, your benefit could be reduced by up to 30%. Delaying benefits until age 70 can increase your monthly payment by up to 8% for each year you wait, making timing a critical factor in maximizing your lifetime benefits.

Key takeaway: Evaluate your financial needs, consider other income sources, and understand the implications of when to claim Social Security to ensure a stable retirement income.