If You Can't Answer These 3 Questions, You're Not Ready for Social Security

If you can't affirmatively answer questions such as "Am I fit enough?" and "Do I know what to expect?" you're not ready to conquer Mt. Everest. Similarly, if you can't answer questions such as these three, you're probably not ready to be making important decisions regarding Social Security.

If you don't know at least some basic facts about Social Security, you can learn a lot in just an hour or less, and it will be time well spent. But start with these three questions and see how well you can answer them. If you find yourself flummoxed, read on for some tips on how to address them in order to get on sounder financial footing.

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1. How much do I expect to receive in Social Security benefits?

First, know that the average monthly retirement benefit was recently just $1,677, or about $20,000 a year. That's quite a modest sum. You will collect more than that if you've collected above-average earnings over your working life, but it still won't be a fortune. The maximum possible amount is roughly $50,000 per year.

You can get a more precise estimate of what your specific benefits are likely to be by setting up a my Social Security account at the Social Security Administration (SSA) website. Once you do, you can check it any time and see estimates of what you'll likely collect depending on when you start collecting your benefits -- based on your current earnings history. 

2. How much retirement income do I need?

Next, estimate how much retirement income you'll need. You might start by taking an amount you can comfortably live off of, and then make adjustments. Referring to a budget of what your cash inflows and outflows are can help, too. Do that by going through your spending records, such as checkbooks, bank statements, and credit card statements, and listing all your spending categories, such as food, transportation, utilities, housing, taxes, travel, entertainment, clothing, and so on.

Note that in retirement, your expenses will likely be a bit different. You may not spend as much on clothing, as you won't need any suits for work, and you might spend less on gas and tolls too if you're not commuting to work. But you might spend more on travel, visiting loved ones, and perhaps more on healthcare, especially as you age.

Try to be a bit conservative in your estimates, to be on the safe side. If you're still many years from retiring, factor in inflation, which will make your future income needs higher.

You'll generally need around 80% of your preretirement income in retirement -- but be sure and make your own estimates, carefully, because each of us is a little different, and these are important matters.

3. How can I build the income streams I need?

Once you know how much income you're shooting for in retirement and what you can expect from Social Security, you'll know if you have an income gap. Most people will. You now have to figure out how to generate the remaining needed income.

Saving and investing effectively over many years is a great way to build a hefty nest egg to tap in retirement. Here's how you might grow one over time:

Data source: Calculations by author.

As you approach and enter retirement, shifting much of your portfolio into dividend-paying stocks can be an effective strategy. A portfolio with, say, $300,000 investing in a bunch of healthy, growing dividend payers with an average overall yield of, say, 4% will generate about $12,000 in dividends annually -- and that sum will likely grow over time. Investing in simple, low-fee index funds for many years is also a powerful wealth-building move.

You might also look into whether a fixed annuity makes sense for you -- it involves paying an insurer a big lump sum in exchange for regular payments that can last as long as you (and, perhaps, your spouse, too) live. A reverse mortgage is not right for everyone, but do your research if you're interested to see if it's right for you. It offers regular income for as long as you remain in your home, with the home as collateral.

As you can see, once you're armed with some critical information, you can start making a solid retirement plan that can get you to a comfortable, financially secure future.