Sometimes financial writers cover topics that are simply out of reach for many people. Today, instead of extolling the virtues of a Roth conversion or something similar, we are going to focus on 10 Retirement Planning Basics.

Like learning how to catch and throw before you can play baseball, there are certain retirement planning fundamentals that must be understood before you can effectively plan for retirement. With that as an introduction, let’s get started with our list of 10 Retirement Planning Basics.

#1: Social Security Benefits

The Social Security Administration website ssa.gov tells you how much you will receive in Social Security retirement benefits. The amount is different for everyone. Your Social Security retirement benefits are based on how much you pay into the system over the course of your working years. To see how much you will receive, simply create an account at ssa.gov.

#2: Social Security Start Age

You can begin drawing Social Security retirement benefits as early as age 62 or as late as age 70. The age you begin drawing Social Security permanently sets your monthly benefit amount. An example in the next section better illustrates this point.

#3: Maximize Social Security Benefits

The Social Security Administration has done the math to determine the monthly benefit amount that will result in you getting the same total benefits through life expectancy no matter when you start taking Social Security.

It’s a fairly simple concept. Suppose two people owe you $10 and the debt is due by a certain date. One person begins repaying you 10 days before the due date at a rate of $1 per day. The other person waits until 2 days before the deadline and makes 2 payments of $5 each. Both people repaid the $10 debt, just with different payment amounts. Social Security works the same way.

When you wait until later to begin taking Social Security, they have to pay you more each month to “catch up". The later you begin taking Social Security retirement benefits, the larger your monthly checks. Listed below is an example of one person’s benefits to illustrate the difference in monthly Social Security checks based on start age:

SOCIAL SECURITY MONTHLY BENEFITS BY START AGE

START AGE	MONTHLY AMOUNT
62	$2,000
63	$2,105
64	$2,216
65	$2,374
66	$2,544
67	$2,726
68	$2,944
69	$3,180
70	$3,434

Now let’s see how well Social Security did with the math. Below is a table with the same monthly benefits by start age multiplied by the number of months between start age and Social Security average life expectancy (81):

SOCIAL SECURITY TOTAL BENEFITS BY START AGE

START AGE	MONTHLY AMOUNT	MONTHS	TOTAL BENEFITS
62	$2,000	228	$456,000
63	$2,105	216	$454,680
64	$2,216	204	$452,064
65	$2,374	192	$455,808
66	$2,544	180	$457,920
67	$2,726	168	$457,968
68	$2,944	156	$459,264
69	$3,180	144	$457,920
70	$3,434	132	$453,288

As you can see, you get approximately the same total amount of Social Security benefits between start age and age 81 no matter when you start. That is a big deal, and here’s why: What happens if you live longer than 81? 

In our example, if you started taking Social Security at age 62, you will keep getting the same $2,000 check each month beyond 81 years of age. Likewise, if you waited until age 70 to start taking Social Security, you will keep getting the same $3,434 check each month beyond 81 years of age. When you are 82 years old, which would you rather receive each month, a check for $2,000 or one for $3,434? The larger check represents a 70% increase!

#4 Social Security Spousal Benefits

Did you know that Social Security has Spousal Benefits? When your spouse passes away, you begin receiving their Social Security benefit instead of your own if theirs was greater. That's why it's important to marry someone older who earns a lot of money (just kidding).

#5: Social Security Start Age vs. Retirement Age

Your retirement date and the date you start taking Social Security do not necessarily have to be the same.

As we have demonstrated, there may be significant advantages to delaying the start of Social Security. Doing so may not only benefit you, but your spouse as well if they live longer than you.

It all comes down to the amount of retirement savings you have and your anticipated longevity (and that of your spouse). The following sentence is a mouthful but it encapsulates everything we’ve covered in items 1-5 and is everything you need to know about timing the start of Social Security retirement benefits:

If you believe you will live longer than Social Security average life expectancy (81), or you believe that your spouse will outlive you (not necessarily in age but in years after you are gone), and you have enough retirement savings to support your lifestyle without needing Social Security (at least at first), you should delay the start of Social Security for as long as possible.

#6 Medicare Eligibility

Have you ever wondered why so many people retire at 65? You are not eligible for Medicare until you are at least 65 years of age. If you retire before 65, you won’t have any medical insurance. 

Unlike with Social Security, your spouse can’t help you. Medicare is individual insurance. You have your own plan, and your spouse has their own plan.

There are millionaires who retire early and jump back into the workforce for this very reason. They need medical insurance and they don’t want to squander their savings on high-cost individual insurance plans. You will do well to bake this basic fact into your retirement plans.

#7 Is Social Security Enough?

The average individual U.S. gross income is $60,000 per year. Someone with that level of income who retires at 65 can expect to receive about $2,250 in monthly Social Security benefits. That works out to $27,000 per year. That is less than half the amount they earned when they were working.

Each individual situation is different, but generally speaking the more money you earn, the smaller the percent Social Security replaces. For example, someone earning twice that much ($120,000) will receive Social Security benefits equal to only about one-third of what they earned when they were working.

Can you live on half of your income? How about just one-third? Most people can’t.

Social Security was never meant to be a retiree’s sole source of income. Social Security is not enough to live on. If you want to maintain the same standard of living in retirement that you enjoyed when you were working, you need retirement savings to supplement Social Security.

#8 Pensions vs. 401(k) Plans

Prior to the 80s when fixed-benefit pension plans were prevalent, workers could expect a gold watch and a cushy pension when they retired. Pensions were like magic. They gave you what you needed to maintain your lifestyle no matter how long you live. Not exactly, but that was the general idea. 

Pensions are long gone and now we are stuck with the 401(k). A 401(k) is just a lump of money. You have to decide how big to make it, and then in retirement you have to decide how much you can afford to withdraw each year. One misstep and you may find yourself running out of money.

In a simple world, here is all it would take to plan for retirement: “I make $60,000 per year and I think I will live 20 years after I retire, so I need $1.2 million." (20 x $60,000 = $1.2 million).

In the real world, it doesn’t work that way. There are numerous factors to complicate matters, such as Social Security, taxes, inflation, and investment earnings. Fortunately, computers are great at solving math puzzles like that. Computer-based retirement tools are your best hope of getting this right. Financial modeling software performs year-by-year simulation to deliver results tailored to your unique situation. To learn more, check out this article entitled Best Retirement Planning Software.

#9 I’m Rich!

When it comes to money, many people struggle with self-control. One solution is to stick your head in the sand – don't even look at your retirement savings.

Then one day you retire and finally see your account balance. “Wow! Look at all those zeros! I’m rich!"

No, you’re not.

Take that amount and divide it by 20 years (on average) that it has to last. That represents roughly how much you can withdraw each year. For example, a $300,000 balance divided by 20 is only $15,000 per year. That is not rich.

As we’ve said, the math is not that simple, but it will get you in the ballpark. 

Many foolish people see all that money and run out and buy a new house and a new car and go on vacation and next thing you know they have nothing left. Don’t be like them.

#10 Retirement Savings Security

A recent story in the news told the tale of a lonely 87-year-old Holocaust survivor who went online to find companionship. He met a 36-year-old Florida woman named Peaches. She repeatedly asked him for money until she had defrauded him of his entire $3 million in savings. He ended up homeless and she bought a home in a gated community and purchased an expensive sports car and other luxury items.

There are countless stories like this where elderly people are scammed out of their life savings. Let’s face it, when we get older, most of us will not be as sharp as we once were. It might be wise to make arrangements to safeguard the security of your retirement savings. 

For example, when you reach a certain age you could begin running major financial decisions past your children or someone else that you trust. Regardless of the mechanism you put in place, don’t become an old fool and give your money away.

Conclusion

That brings us to the end of our list of 10 Retirement Planning Basics. We hope you found this list helpful and will consider passing it along to someone else who may benefit from it. We invite you to come back and learn more about retirement planning and personal finance. As always, thank you for reading the Eggstack Blog. We appreciate you.

Photo credit: Mike Ballew The Eggstack Blog will never post an article influenced by an outside company or advertiser. Our mission is to help you overcome uncertainty about retirement planning and inspire confidence in your financial future.