Social Security income plays a pivotal role in your financial plan. For many, trying to determine when to begin collecting Social Security, how it works in conjunction with other potential income streams, and what strategies should be considered for retirement distributions from retirement savings plans are issues that leave them at times paralyzed in their retirement planning.
But don’t worry—we’re here to help simplify the complex. Let’s take a look at the current state of Social Security and dive into some strategies to optimize your benefits.
Social Security and Other Retirement Accounts
There are three main components to most retirement plans: Social Security, tax-deferred retirement plans such as 401(k)s and IRAs, and withdrawals from other savings and investments.
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. 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. The average cost of retirement for retirees between the ages of 65-74 is $53,916 annually or $4,495 per month. For comparison, the maximum monthly benefit amounts for Social Security are listed below:
- 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
When comparing these amounts we can see that the average expenses of today’s retirees, compared to the maximum benefits available, will leave most with a shortage ranging from $300-$2,100 per month. This serves as a great reminder that proper planning is essential for all retirees to help narrow that gap as much as possible.
Crucial Claiming Decisions
Planning ahead involves understanding two important claiming decisions that can help 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 to properly plan for retirement. Unfortunately, many problems with the current system 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.
A Retirement Plan That Fits Your Needs
With projections indicating a potential downturn in Social Security benefits within a decade, it is crucial to consider alternative income sources once you retire. While Social Security income is a valuable component of your financial plan, it often proves insufficient to shoulder the complete load of the average amount of retirement expenditures.
By supplementing Social Security with diverse income streams, including personal savings, investments, and retirement accounts, one can establish a robust financial underpinning for the years of retirement ahead.
At Center for Wealth Management, we work collaboratively with you to craft strategies that align Social Security’s benefits with your retirement aspirations. If your retirement journey is on the horizon, we would love the opportunity to work with you. Schedule a free introductory meeting online, call (248) 220-4321, or email me at email@example.com.
Justin Williamson is a senior partner and co-owner of Center for Wealth Management, an independent, fee-based wealth management company in Troy, Michigan. Justin has been serving clients in the financial services industry since 2001. He spends his days helping his clients achieve their financial goals and make the best decisions for their families so they can spend time on what they love and experience financial confidence. Justin is known for his dedication, integrity, personal touch, and ability to simplify complex issues. Justin specializes in serving engineers and other professionals who are close to retirement or recently retired and helping them maximize their benefits and create a retirement plan they can rely on. He is a seasoned public speaker and presents at numerous corporate events each year on retirement planning, Medicare, Social Security, and other financial topics. Justin has a bachelor’s degree in Business Administration majoring in Personal Financial Planning from Central Michigan University and is a CERTIFIED FINANCIAL PLANNER™ practitioner.
Outside of work, Justin enjoys spending time with his family. He and his wife, Corinne, have five children between them ranging in age from sixteen to twenty years old. Justin lost his first wife, Heather, to brain cancer in 2020, and thus has experienced firsthand the emotional, mental, and financial challenges spouses and children go through when dealing with such a tragic situation. Outside of work, Justin enjoys coaching or attending baseball, softball, powerlifting, and basketball events, traveling to new locations, and spending time at the family cabin at Higgins Lake. Learn more about Justin by connecting with him on LinkedIn.