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Throughout your working career, you pay employment taxes that help fund Social Security, which provides income when you retire. In 2023, nearly 67 million people will receive Social Security benefits, collectively totaling more than $1 trillion.

There are strict rules about when you can claim Social Security benefits. You can start collecting retirement benefits as early as age 62, but if you can delay claiming your benefits, your monthly benefit amount can continue growing until you reach age 70.

Learn more about Social Security benefits, early retirement age, and the advantages and disadvantages of filing for your benefits early and late.

What Are Social Security Benefits?

Social Security is a social insurance program created in 1935 to pay workers an income once they retired at age 65 or older. When people talk about Social Security benefits, they’re referring to a monthly payment that replaces a portion of a worker’s pre-retirement income.

The amount you receive depends on how much you earned and paid in Social Security taxes during the 35 highest-earning years of your career. Generally speaking, the higher your income, the bigger your monthly check will be — up to a point. Also important is the age at which you claim benefits. Typically, the later you receive benefits, the higher your monthly check will be.

Note that retirees aren’t the only ones who are eligible for Social Security benefits. People with qualifying disabilities, surviving spouses of workers who have died, and dependent beneficiaries may also qualify for benefits.

Recommended: When Will Social Security Run Out?

At What Age Can You Collect Social Security?

When the Social Security program began, the full retirement age (FRA) was 65, and that’s still what many in the U.S. think of as the average retirement age. However, as life expectancy in the U.S. has increased, the Social Security Administration (SSA) has adjusted the FRA accordingly.

The chart below illustrates FRA by year of birth.

Recommended: At What Age Should You File for Social Security?

What Is the Early Retirement Age for Social Security?

You can choose to claim retirement benefits as early as age 62. However, SSA will reduce your benefit by about 0.5% for every month you receive benefits before your FRA. For example, if your full retirement age is 67 and you file for Social Security benefits when you’re 62, you’d receive around 70% of your benefit.

On the other hand, if you wait to claim benefits after your FRA, you’ll accrue delayed retirement credits. This increases your benefit a certain percentage for every month you delay after your FRA. For example, if your full retirement age is 67 and you delay receiving benefits until age 70, you’ll get 124% of your monthly benefits. Note that the benefit increase stops when you turn 70.

Recommended: When Can I Retire? This Formula Will Help You Know

Can You Claim Social Security While You’re Still Working?

When you claim your Social Security benefits, the SSA considers you retired. However, you can continue working after retirement and receiving benefits at the same time, though they may be limited.

If you’re younger than FRA for the entire year, the SSA will deduct $1 from your payment for every $2 you earn above an annual limit. In 2023, that limit is $21,240. In the year you reach full retirement age, the SSA will begin deducting $1 for every $3 you make above a different earnings limit — $56,520 in 2023.

No matter their work history, your spouse has the option to claim Social Security benefits based on your work record. That benefit can be up to 50% of your primary insurance amount, which is the benefit you’d receive at FRA. Your spouse can begin receiving spousal benefits at age 62, but they will receive a reduced benefit.

Pros and Cons of Claiming Social Security Early

The main advantage of filing for Social Security early is that you’ll have access to retirement funds sooner. This can be a boon to individuals who need extra money to get by each month. To help you maximize every last dollar, consider using a spending app to create budgets, track spending, and monitor bills.

The main disadvantage of filing early is that you may permanently reduce your monthly benefit amount. This could be a factor to keep in mind as you determine whether you’re on track for retirement.

So how do you decide when to file for your benefits? Consider your “break-even point.” This is the age at which receiving a delayed higher benefit outweighs claiming benefits earlier.

Here’s an example of how that works. Let’s say your FRA is 67 and your annual benefit is $24,000. If you claim your benefit at age 62, your benefit drops to $16,800 a year. If you delay until age 70, your benefit would be $29,760 a year.

By adding up each year’s worth of benefits and comparing them across different potential retirement ages, you find your break-even point. So in that last example, claiming your benefit at FRA breaks even with early filing at age 78. If you expect to live until this age or longer, you may consider filing for Social Security at full retirement age. Delaying until age 70 breaks even with claiming at FRA at age 82. So if you expect to live until 82 or longer, you may consider delaying your benefits.

Recommended: How Can I Retire Early?

The Takeaway

Social Security is an important source of guaranteed income during retirement and can help ensure you can cover recurring expenses like housing payments and utilities. Your monthly payment amount is determined by how much you’ve earned during your working career and the age at which you claim Social Security benefits. You’re eligible to receive your full benefits when you reach full retirement age (FRA). If you file before then, the monthly payment will be reduced. If you file later, your monthly payment can increase, up to a point. Consider your short- and long-term financial needs carefully before deciding when to claim Social Security.

Whether you’re planning to continue working past your FRA or are preparing for retirement, using a money tracker app can help you manage your overall spending and saving. The SoFi app connects all of your accounts in one convenient dashboard. From there, you can see all of your balances, spending breakdowns, and credit score monitoring, plus you can get other valuable financial insights.

Stay up to date on your finances by seeing exactly how your money comes and goes.

FAQ

Can I take Social Security at age 55?

You cannot claim Social Security benefits at age 55. The earliest you can file for benefits is age 62.

What happens to my Social Security if I retire at 55?

If you retire at 55, you will have to wait seven years, until age 62, before you are eligible to claim early Social Security benefits. Retiring early may also affect the size of your benefit if you are leaving work in your top-earning years.

What is the average Social Security benefit at age 62?

The average monthly Social Security retirement benefit in 2023 is about $1,827 for those filing at full retirement age. Filing early at age 62 would reduce that benefit by 30% to $1,278.90.

Photo credit: iStock/svetikd

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At some point or another, you’ve probably wondered if you have enough money for the future and asked yourself, “how much retirement should I have at 40?”

It’s an important question. Hopefully, you’re already saving some money for retirement. However, you might not be saving enough to retire when you want.

There are different ways to save money for retirement. The sooner, the better—so that it can start adding up. Here’s how to maximize your retirement savings at age 40 and beyond.

Understanding Your Retirement Savings at 40

Now, to answer the question: How much money should I have saved by 40? A general rule of thumb recommended by many financial advisors is to have about three times your annual salary saved in retirement money by the time you’re 40.

Knowing this general benchmark is helpful for your retirement planning.

What Does the Average 40-Year-Old Have Saved?

According to a recent study from Northwestern Mutual, people in their forties say they currently have $77,400 saved for retirement. However, that’s a long way from the amount they expect to need for retirement, which is $1.28 million.

How Your Retirement Savings Compare to National Averages

Compared to the guideline of having three times your annual salary saved by the time you’re 40, if you only have the amount reported by the respondents in the Northwestern study — $77,400 — you’ve got some work to do. The good news is, you’ve probably got around 20 years or more to help get where you need to be by the time you’re ready to retire.

Factors Influencing Your Retirement Savings So Far

As you reach your 40s, it’s likely that your income is increasing, but so are the obligations that are tied to your money.

You might be saving money for your kids’ college; you probably have mortgage payments and existing debt, including your own student loans; you may even be taking care of aging parents. It’s a lot of financial multitasking and you have to prioritize.

In addition to all that, inflation over the past couple of years has made many prices higher, which could increase your cost of living. Overall, prices are 13% higher than they were two years ago, according to Consumer Price Index data. You might also be dealing with unemployment or a job layoff. All these factors can make saving for retirement more challenging.

The Right Retirement Savings Path for You

To map out a savings plan that makes sense, you can start by estimating how much money you’ll need for retirement. It’s also a good idea to look at your goals. That includes figuring out when you might want to retire, what kind of lifestyle you want in retirement, and how much money you might have coming in during your golden years. That will help you determine how much you need to save.

Projecting Your Retirement Needs

Start by thinking about the kind of lifestyle you’d like to have in retirement. Will you move to a smaller home? If so, you may save money on housing costs. On the other hand, if you’d like to travel frequently, your expenses may increase.

Also, estimate what your budget as a retiree might be. Include housing, utilities, insurance, food, transportation, clothes, and so on. And don’t forget entertainment expenses like movies, concerts, and meals out.

Next, factor in healthcare expenses. Health-related costs can be significant in retirement, depending on your medical situation.

Retirement Savings Rate: How Much of Your Income to Save

While each person’s situation and needs are unique, there are some general guidelines that can help project your financial needs during retirement.

For instance, according to Fidelity, you should try to save 15% of your pre-tax income each year if you plan to retire at age 67.

Another rule, known as the 80% rule, says you should have enough money by the time you retire to cover 80% of your pre-retirement income.

Milestones for Retirement Savings By Decade

As discussed, when you plan to retire and what kind of lifestyle you’d like to have in retirement are two of the main factors that affect how much money you’ll need to save. The milestones below are general, but they will give you an idea about how much to save at various ages.

Retirement Savings By:

•  Age 30: 1x your annual income

•  Age 40: 3x your annual income

•  Age 50: 6x your annual income

•  Age 60: 8x your annual income

•  Age 67: 10x your annual income

Maximizing Your Retirement Savings in Your 40s

If you haven’t saved 3 times your annual income by your 40s, or even if you have, here are some ways to make the most of your retirement funds in this decade.

Benefits of a Roth 401(k) and When to Consider It

Some 401(k) plans give you the opportunity of choosing a Roth 401(k) to save for retirement. If your employer offers such a plan you may want to consider it.

The difference between a Roth 401(k) and a traditional 401(k) is that with a Roth 401(k), contributions are made using after-tax funds. That means they aren’t tax deductible, but the withdrawals you make in retirement are tax-free. In addition, you don’t pay taxes on your annual investment earnings in a Roth 401(k). With a traditional 401(k), the contributions you make are tax deductible, however, you will pay taxes on your retirement withdrawals. So a Roth 401(k) can be beneficial if you expect to be in a higher tax bracket by the time you retire.

The good news is, you can contribute to both a Roth 401(k) and a traditional 401(k) as long as your plan allows it. Just know that there are yearly limits on your contributions. Across both plans, individuals under age 50 can contribute $22,500 annually in 2023.

If you have a traditional 401(k), there are a number of strategies to max out your 401(k) that are worth looking into. For example, it makes sense to contribute at least enough to qualify for any employer matching that your company offers. Why lose out on the “free” money your employer is willing to contribute to your retirement savings?

Catch-Up Contributions: Leveraging Them When the Time Comes

Once you reach age 50, you can make catch-up contributions to your 401(k) plan, as long as your plan allows them, which could help you save even more for retirement. In 2023, the catch-up contribution is an additional $7,500. That means, in total, individuals 50 and older could contribute up to $30,000 to their 401(k) in 2023.

Knowing about catch-up contributions when you’re in your forties could help you plan and prepare for them when you reach 50. Catch-up contributions can help you make the most of your retirement plan.

Investment Strategies for Mid-Career Savers

There are many other ways to save for retirement, even beyond the employer-sponsored 401(k) and Roth 401(k).

Some people choose to put their retirement savings in more than one type of account. This is useful if you want to set aside more than the yearly contribution limits on 401(k) plans. In that case, it might make sense to open an IRA savings account to save beyond the 401(k) limits, as long as you meet the necessary criteria.

Recommended: A Look at Traditional IRAs vs Roth IRAs

The Role of Expenses in Retirement Planning

Figuring out how much your retirement living expenses will be is important for calculating how money you’ll need to save. These are some of the things you may want to consider and budget for.

Emergency Savings vs. Retirement Savings

Your retirement savings are extremely important. However, if you don’t have an emergency fund that can cover three to six months’ worth of living expenses, consider putting that at the top of your priority list.

Why? While retirement is still likely to be years away if you’re 40 now, an emergency could happen at any time. For instance, you may be faced with an unexpected medical procedure that you’ll need to pay for if insurance doesn’t cover it all. Or your heater might break in the middle of winter and need to be replaced. If you don’t have the emergency funds to cover these things, you risk taking on debt. And that could in turn limit your retirement savings as you work to pay off that debt.

Of course, if you can afford to contribute to both an emergency fund and your retirement savings, by all means, do so.

Planning for Healthcare Expenses in Retirement

As people grow older, their healthcare needs and costs typically increase. For many, healthcare can be one of the biggest retirement expenses.

Fidelity estimates that the average person may need $157,500 to cover healthcare costs in retirement. If you have a high-deductible health insurance plan, you might want to look into a Health Savings Account (HSA), which could potentially help you save money to cover some healthcare costs.

Incorporating Home Costs Into Retirement Savings

Housing costs are another major retirement expense. You may have mortgage payments, homeowner’s insurance, and home maintenance and repairs to pay for. If you rent, you’ll have to cover your monthly rental fee plus renters’ insurance.

Additionally, where you live — the city and state — can impact how much you pay for housing. In general, living on the coasts can be more expensive. You may want to take the cost of living into consideration when you’re thinking about where you want to live in retirement.

Family and Retirement: Balancing the Present and Future

Of course, along with saving for retirement, you have present-day expenses and events to pay for as well. This includes important family milestones, such as college and a child’s wedding. Fortunately, with proper budgeting and planning, it is possible to help cover these expenses and save for retirement at the same time.

Budgeting for College Savings While Prioritizing Retirement

To keep building a retirement nest egg while saving for college for your kids, consider some college-savings plans. One good option to consider: a 529 plan that you fund with after-tax dollars. You can contribute to the plan on a regular basis, or whenever you have extra money, and family members and friends can contribute as well. For instance, instead of birthday gifts, ask loved ones to contribute to your child’s 529 instead.

Virtually every state offers a 529 plan and you can shop around to find one that has the best tax benefits and lowest costs. Open the plan as early as you can when your child is young so that the money invested has more time to grow.

Weddings and Other Major Family Expenses

If you’d like to help pay for your child’s wedding, you could put some money in a savings or investment account so that it can grow over time. If the wedding is coming up relatively soon, you could put your money into a high-yield savings account, for instance, to get a higher interest rate than you’d get from a regular savings account. If the wedding is farther in the future, you might want to invest in mutual funds or a stock index fund, which could deliver more growth.

Expert Strategies to Increase Retirement Savings

There are a number of smart ways to maximize your savings and be on track for retirement. Here are a few strategies experts advise.

Salary Negotiations and Their Long-Term Impact on Savings

If it’s been a while since you’ve received a raise, this may be a good time to ask for one. By age 40, you’ve probably developed skills that make you valuable to your employer.

If you need some incentive for negotiating for a higher salary, consider this: Even an extra $100 a week invested for the next 20 years with a 10% annual return could give you approximately $300,000 more in retirement savings.

Building a Solid Financial Foundation with a Six-Month Emergency Fund

As we discussed earlier, having an emergency fund is critical for any unexpected expenses that arise. Ideally, it’s wise to have six months’ worth of expenses saved up. That can help tide you over in case of job loss or some other significant event that affects your income.

You can open a high-yield savings account for your emergency fund to help it grow. Consider automating your savings to make sure you’re contributing to your emergency fund regularly.

Then, once you’ve reached six month’s worth, you can allocate the money you had been contributing to the emergency fund to your retirement savings.

Why Prioritizing Roth Retirement Accounts Can Pay Off

Investing in a Roth IRA can be helpful if you want to withdraw money in retirement without paying taxes on it. After-tax accounts can be appealing to individuals who plan to achieve financial independence at a younger age and retire early. Unlike qualified plans, which place penalties on withdrawing funds before a certain age, an after-tax account is a pool of money that you can withdraw from without having to worry about penalties if you access the account before age 59 ½.

Even if you wait until age 67 to retire, if you expect to be in a higher tax bracket at retirement, a Roth IRA can make sense since you won’t have to pay taxes on retirement withdrawals.

For 2023, you can contribute up to $6,500 annually in a Roth IRA. Individuals 50 and older can contribute $7,500. That said, there are income limits on Roth IRAs. The amount you can contribute starts to phase out if you earn more than $138,000 as a single tax filer, or $218,000 for married couples who file jointly.

The Takeaway

While there are conventional rules of thumb as to how much money you should have saved by 40, the truth is everyone’s path to a comfortable retirement looks different. One piece of advice is universal, however: The sooner you start saving for retirement, the better your chances of being in a financially desirable position later in life.

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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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