By Jay Shareef and Chris Rhoads
If you are nearing retirement, you’ve paid into the Social Security system and you’ll be able to claim benefits at some point. You know this—but do you know the extent to which Social Security fits into your full retirement plan?
It’s that mysterious safety net we’ve all heard about, promising some sort of financial relief during our golden years. But what’s the real deal? When should you claim those benefits? And what’s the current state of Social Security in a world that’s constantly changing? Let’s dive into these questions and help you figure out where Social Security fits into your retirement plan.
There are three main components to most retirement 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 21% 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 will play an even bigger role in your retirement plan, and chances are that it won’t be enough by itself.
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: $2,572 per month
- Maximum benefit at full retirement age: $3,627 per month
- Maximum benefit payment if you wait until age 70: $4,555 per month
The average cost of retirement for retirees between the ages of 65-74 is $53,916 annually, or $4,495 per month. These costs include housing, transportation, and unknowns like healthcare expenses and long-term care costs. 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!
It’s easy to see just how big of an impact Social Security can make on your retirement plan, which is why planning ahead is a vital part of maximizing your benefits.
Planning ahead involves understanding two important claiming decisions that can help to optimize your total lifetime benefit:
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 have other income sources and 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.
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.
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 2034, 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.
In the ever-evolving landscape of retirement planning, 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.
Social Security is still a crucial piece of the puzzle, and knowing when to claim benefits can significantly impact your financial well-being during retirement. So, whether you’re eager to retire early and enjoy life to the fullest, or you plan to work a little longer for that added cushion, understanding the ins and outs of Social Security is essential. If you don’t already have an advisor assisting you, we at WealthFlow Financial can help. Reach out to us at (301) 798-5250 or schedule a phone call now.
Jay Shareef is vice president, financial advisor, federal benefits consultant, and co-founder at WealthFlow Financial. As a U.S. Army veteran, Jay is passionate about helping federal employees create a bulletproof plan for retirement and navigate the often confusing and complicated federal benefits landscape. He spends his days educating and providing clients with unbiased insurance benefits and retirement strategies to help his clients create guaranteed income for life. As a problem-solver and trustworthy resource, Jay always puts his clients and their needs first so they can find financial peace of mind. To learn more about Jay, connect with him on LinkedIn.
Chris Rhoads is a co-founder and vice president of WealthFlow Financial. As a registered investment advisor and independent financial professional, Chris is committed to helping his clients in retirement and he takes a holistic approach to financial planning that includes insurance and risk management, investments and wealth management, retirement income planning, and estate and tax planning. Chris has been married to his wife, Tia, since 2009 and they live in Frederick, MD, together with their two young daughters. In his free time, Chris enjoys traveling, watching sports, and being active in causes about which he cares passionately. To learn more about Chris, connect with him on LinkedIn.