If you are nearing retirement, then Social Security is probably on your mind. In fact, 30% to 90% of your post-retirement income could come from Social Security. Because of this, we believe it’s crucial to understand how and to what extent Social Security fits into your full retirement plan.
In this guide, we will review the role Social Security may play in your retirement planning, the current state of Social Security, and strategies to help you maximize your benefits.
The Three-Legged Stool
There are three main components to most retirement income plans: Social Security, pension benefits, and withdrawals from savings. If retirement was a stool, then these components would be the legs holding up the seat.
Having all three “legs” is ideal, but it’s not always realistic. Pensions have become less and less common as employers shift toward other forms of deferred compensation and only about 31% of Americans will retire with pension benefits at all. Another report suggests that only 7% will retire with all three retirement legs.
If you are part of the majority of Americans who won’t be able to rely on a pension, your Social Security may play an even bigger role in your retirement income plan, and chances are that it may not be enough by itself.
Will Social Security Make an Impact?
We feel that one of the most important aspects of retirement planning is quantifying how much your retirement will cost versus how much you will receive from Social Security.
Let’s take a look at the numbers:
- Maximum benefit payment at age 62: $2,364 per month
- Maximum benefit at full retirement age: $3,345 per month
- Maximum benefit payment if you wait until age 70: $4,194 per month
The average cost of retirement for retirees between the ages of 65-74 is $53,916 annually, or $4,495 per month. When compared to the maximum benefit amounts listed above, this means that if Social Security is your only source of retirement income, you could be looking at a deficit between $301 and $2,131 per month!
This illustrates just how big of an impact Social Security can make on your retirement income plan, which is why planning ahead can be a vital part of maximizing your benefits.
Social Security Claiming Decisions
Planning ahead involves understanding two important claiming decisions that can help you to optimize your total lifetime benefit:
When to Claim Benefits
Social Security benefits can be claimed between ages 62 and 70. However, the timing of benefits will impact the total amount received. Benefits claimed at 62 will result in a reduced monthly amount, while waiting until full retirement age will allow you to receive your full primary insurance amount, which is the full benefit that you have earned based on the amount you’ve paid into the Social Security system. If you don’t need your benefit at this age, you can delay your claim. For each year you delay, your benefit will increase by 8% until it caps out at age 70.
When to Claim Spousal Benefits
Deciding how and when to claim spousal benefits will depend on your unique financial situation and should be reviewed thoroughly in the context of your overall retirement income plan. In general, the lower-earning spouse may choose to begin collecting benefits early or at full retirement age, while the higher-earning spouse may wait until age 70. This will allow the couple to make use of the lower benefit, while allowing the higher benefit to grow to its maximum amount.
The Current State of Social Security
No matter how or when you claim your benefits, we believe understanding the current state of the Social Security program is crucial in order to properly plan for retirement. Unfortunately, there are many problems with the current system that make projecting long-term benefits more difficult. Recent estimates suggest that the program will run out of funding by 2035, at which point, if no changes are made, benefit payments may shrink to 80% of what Americans expect.
The issues with the program range from persistently low interest rates and collectively longer retirements, to significantly more beneficiaries and not enough workers contributing to the fund. Taken as a whole, these factors indicate that the Social Security system is currently underfunded and not earning enough to pay off its obligations.
Social Security & Your Retirement Plan
With such a large drop-off in benefits predicted in just over 10 years, it’s important to safeguard your retirement plan by ensuring that Social Security is not your only source of income. Yes, Social Security acts as a great pillar for retirement, but on its own, it’s often not enough to carry the weight of the average American’s retirement costs.
Keep in mind that retirement income planning encompasses more than just a solid understanding of your Social Security benefits. If you do have additional resources to draw on during retirement, we believe structuring a tax-efficient withdrawal strategy is important to help you not pay more in taxes than you have to.
Social Security is just one piece of the retirement puzzle. At Millstone Financial Group, we can help you look at the different aspects of your plan so the various pieces of your retirement puzzle fits together. Whether you’re retired, planning to retire, or building to retirement, you need a financial game plan!
To get started, schedule a complimentary consultation by calling (732) 385-8544 or emailing dalbach@millstonefinancial.net, and don’t forget to request your complimentary copy of our second opinion guide today!
About Don
Donald Albach is President and Co-Founder of Millstone Financial Group, an independent financial advisory firm helping pre-retirees and retirees pursue their retirement goals. Don has over 26 years of experience in the financial industry and focuses on retirement planning, designing retirement income planning strategies to guide his clients toward financial independence. Don graduated from Norwich University, the nation’s oldest private military college, and has worked his entire career in the financial services industry, including First Boston, MetLife, and C&A Financial Group. He co-founded Millstone Financial Group in 2012 with Michael Russo. Don and Mike met each other while working at MetLife, and in 2003 both he and Mike were recruited to work at C&A Financial Group, where they spent the next 10 years. It was at C&A Financial Group where they decided they needed to start their own company that strictly focused on retirement income planning. They both had a desire to help people navigate the complexities of retirement and created Millstone Financial to do just that. Don currently lives in Monroe Township, NJ, with his wife, Tina, to whom he has been married since 1992. They have three children together: Paige, Donny, and Ally. Don’s two passions are sailing and watching college football, and he also enjoys cooking Sunday dinner for his family. To learn more about Don, connect with him on LinkedIn.
Advisory services are offered through Millstone Financial Group Limited Liability Company, a Registered Investment Advisor in the State of New Jersey. Insurance products and services are offered through Millstone Financial Group Limited Liability Company. Millstone Financial Group Limited Liability Company is not affiliated with or endorsed by the Social Security Administration or any government agency.
All material discussed is for informational purposes only. Opinions expressed are solely those of Millstone Financial Group Limited Liability Company and staff. All topics covered are believed to be from reliable sources; however, Millstone Financial Group Limited Liability Company makes no representations as to its accuracy or completeness. Investing involves risk including the loss of principle.
This article shall in no way be construed as a solicitation to sell securities or investment advisory services to residents of any state other than New Jersey, or where otherwise permitted. All information and ideas should be discussed in detail with your individual adviser prior to implementation.
This material is intended to provide general financial education and is not written or intended as tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.
