When you retire, the government send you money. But will it be enough money to live on? The key to planning for a healthy retirement is understanding how social security works. Then you can calculate how much money you'll be receiving, and whether you'll need to supplement those social security checks with extra money from other sources!
Fortunately, the Social Security Administration now sends you a statement every year even before you've retired, showing how much money they've already collected from your paychecks in each year of your working lifetime. And it also includes another set of calculations with their best estimate for the amount you'll receive in your social security. The first thing you'll notice is there's three numbers for each calculation. The government increases the amount of your monthly payments if you postpone retirement until you're older, so they've calculated what the monthly payments would be if you retire at age 62, age 67, and age 72.
Should you retire early? Well, first look at the numbers. If you retire at the age of 67, you'll miss five extra years of collecting social security checks! That's five years of 12 months, or 60 months total. Multiply that by the size of the monthly payment that the IRS has calculated for you at the age of 62, and you'll see that it's tens of thousands of dollars. I saw one scenario where you had to continue collecting the checks past the age of 73 before the extra payments surpassed the value of that extra five years of early checks - but then after that, it's an extra 30% a month!
A professional financial advisor will warn you about the biggest secret threat to your retirement income: inflation. While you may have $2,000 a month coming in, it may only be worth $1,000 in the year that you retire! Everyone remembers how cheap things used to be when they were younger - and how much higher the price tags are now. Just remember that that's going to continue to the day that you retire, so the cost of living after retirement will also be higher.
The best way to supplement your retirement income is with contributions to an IRA, a 401K, or another retirement savings plan. The government will give you a break on your taxes for these contributions, usually by letting you subtract the contribution amount from your taxable yearly income. If you start when you're young, the money will continue compounding over the course of your lifetime, often quadrupling in value, and then quadrupling again! That's the best way to enjoy a healthy retirement, no matter how much social security money you end up collecting!