By Matt Cherry, CFP®
As you approach the threshold of retirement, it’s only natural for Social Security to be on your mind. Navigating the vast sea of information on retirement strategies, benefit options, and timelines can pose a challenge for even the savviest planners. You’re likely aware that you’ve contributed to the Social Security system, but understanding the intricacies of your withdrawal strategy and pinpointing the right moment to retire can seem like a perplexing puzzle to solve.
With benefits ranging from 30% to 90% of your post-retirement income, understanding the role and extent of Social Security within your specific retirement plan is critical. Today we hope to explore the role Social Security plays in an average retirement plan, shed light on the current state of Social Security, and equip you with actionable insights to optimize your benefits. Read on to understand how to integrate it into your retirement road map and pave the way toward a more prosperous future.
The Three-Legged Stool
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 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 will play an even bigger role in your retirement plan, and chances are that it won’t be enough by itself.
Will Social Security Make an Impact?
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!
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.
Crucial Claiming Decisions
Planning ahead involves understanding two important claiming decisions that can help to optimize your total lifetime benefit:
1. 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.
2. 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.
How Social Security Fits Into Your Plan
In light of the projected decrease in benefits within a decade, it is imperative to shield your retirement by diversifying your sources of income beyond Social Security. While Social Security serves as a part of the foundation for retirement, it often falls short in carrying the financial burden of the average American’s retirement expenses on its own.
We can’t emphasize enough that retirement planning extends beyond your Social Security benefits. If you have supplementary resources to rely on during retirement, establishing a tax-efficient withdrawal strategy will help prevent unnecessary tax burdens. Carefully structuring your withdrawals can help keep you from paying more in taxes than necessary.
Social Security serves as one piece within the whole retirement picture; and it’s necessary to examine all its components to discern where it fits into your plan. We recommend collaborating with a financial professional when crafting your full financial picture. At ABLE Financial Group, we specialize in developing retirement plans that integrate each part into a cohesive whole. If you find yourself approaching retirement and seeking clarity around the role of Social Security, reach out by calling 480.258.6108 or emailing matt@ablefinancialgroup.com to start your journey toward a successful future today.
About Matt
Matt Cherry is a financial advisor at ABLE Financial Group, a financial services practice that focuses on transition planning and simplifying the complexities of their clients’ wealth. Growing up in a world where it seemed debt was part of everyone’s life, Matt found himself following the same path. He soon realized this was not the way he would meet his goals. He worked his way out of debt, and found an interest in how money works. In his late twenties, Matt stepped away from his career to focus on his education.
In 2014, Matt graduated Magna Cum Laude from the WP Carey School of Business at Arizona State University, where he earned a degree in finance. In 2018, he earned the CERTIFIED FINANCIAL PLANNER™ certification. His extensive education and training fed his passion for helping others pursue their investment goals.
Matt spent the first few years of his financial career with Charles Schwab before transitioning to an independent practice. While he is grateful for the education he received along the way, he was excited to join ABLE Financial Group in 2021. As a financial advisor, he gets to do what he loves, helping individuals pursue their investment objectives.
Outside of the office, Matt looks for active ways to help the community. He served as a Big Brother with Valley Big Brothers Big Sisters. Twice, he completed “America’s Most Beautiful Bike Ride,” a 100-mile bicycle ride around Lake Tahoe to raise money for the Leukemia and Lymphoma Society.
Matt is a native to Arizona, currently living in Chandler with his wife, Lindsey, their two daughters, Emma and Lyla, and dog, Stitch. Family time is a major priority, taking weekend trips to Mexico, going on a hike, or simply playing games together in the backyard. He was an avid cyclist until a back injury led to surgery in 2017. This is when he found his new passion, yoga. He will attest his daily yoga practice is the main reason he is able to walk today.
