Figuring Social Security Into Your Retirement
by Brandon Miller on Jan 26, 2022
There are so few guarantees in life—and they’re mostly bad. Death. Taxes (at least for some of us). Your refrigerator melting down one month after the end of the warranty. These things you can expect.
But what many folks don’t expect is for Social Security to be there when they retire. And, as CNBC reported, the younger you are, the greater your skepticism is about receiving that income stream. That’s too bad, because Social Security should be a vital part of your retirement strategy. Knowing a set amount is guaranteed each month lets you be freer with other investments.
Let me first calm the fears of all of you who don’t think you’ll benefit from this program that you’ve paid into throughout your working life. As you might have heard, there are lots of Baby Boomers retiring and fewer working folks paying into the system, creating an imbalance between funding and payouts. But according to one recent study, anyone 55 and older can plan on getting their full benefit. Younger folks, well, the Social Security Administration estimates that at the very worst, you’ll get 78% of your scheduled benefits. That’s still more than three of every four quarters, which isn’t chump change.
Plus, Congress can act to fill the funding gap before that shortfall happens. Taxing incomes above the current $147k cut-off threshold, reducing payouts to folks with more assets, and increasing the age when you start collecting are all potential, relatively simple fixes.
So, instead of dismissing Social Security, I recommend understanding the part it can play in your retirement plans.
For starters, take the long view of what this income stream means over your retirement years. Let’s say your monthly payout is $2,500. Each year, that’s $30,000 of income. Collect benefits for 20 years, and that’s $600,000. Live long enough to get benefits for 30 years, and you will have received $900,000. Even at 78%, that’s $702,000. Like I said, not exactly chump change.
And, under current and longstanding U.S. policy, this is guaranteed income. I can’t emphasize that enough. Plus, the amount you start with is just a base sum. You receive an annual cost of living adjustment (COLA). For example, this year’s rising inflation means that the COLA for 2022 is 5.9%. And COLAs are never negative. That increase and future ones will compound for the rest of your life.
Now mind you, under current tax law, Social Security benefits count as taxable income for most folks and tax rates are always changing. Nevertheless, anyone eligible can count on a steady source of income that they won’t outlive.
Delaying when you start collecting benefits also increases your payout. While you can start collecting at age 62, that will be a much lower amount than if you wait until retirement age—67 for anyone born in 1960 or later—and collect full benefits. Every month you delay increases the amount you receive.
But wait, there’s more. If you can hold off collecting until age 70, you will get more than your full benefits. To reward you for postponing taking your money, Uncle Sam gives you delayed retirement credits that add up to 8% per year. Your monthly income then can increase over 24% by waiting until your birthday cake holds 70 candles.
Obviously, your health, investments, and other factors will impact your decision of when to start receiving Social Security benefits. If you’re married and both eligible to collect, you might consider a strategy such as taking the lower earner’s benefits at 67 and the higher earner’s at age 70. Divorced folks who were married for 10 years or more may be eligible for half of the ex’s benefit amount—without reducing what the ex gets.
Paying into the system during your working life results in a nice payout once you’re retired. Waiting as long as possible to collect your benefits maximizes that amount, which also increases each COLA’s impact for you in real dollars. And don’t forget the magic of compounding.
Income that’s assured for life and adjusts for inflation. That’s a guarantee you can live with.
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