If you are nearing retirement, Social Security is probably on your mind. With all the information out there about how and when to retire, and what to do with your benefits, it can be difficult to keep it all straight.
Since benefits can form anywhere from 30% to 90% of your post-retirement income, (1) it is crucial to understand how and to what extent Social Security fits into your full retirement plan. At Wellstone Wealth Management, our Life-Centered Planning process can help you make the right decisions about Social Security as you approach retirement.
In this guide, we will review the role Social Security plays in the average retirement plan, the current state of Social Security, and what we do to help our clients get the most Return on Life (ROL) out of their Social Security benefits.
The Three Pillars of Retirement
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 not always realistic. Pensions are becoming less and less common as employers have shifted toward other forms of deferred compensation. In fact, only about 31% of Americans will retire with pension benefits at all, (2) and recent reports suggest that only 7% will retire with all three retirement pillars. (3)
If you are part of the majority of Americans who will not 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 will not 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.
Take a look at the numbers: (4)
- 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 in Oregon is roughly $62,000 annually, or $5,166 per month. (5) 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 $972 and $2,802 per month!
It is easy to see just how big of an impact Social Security can make on your ROL retirement plan, which is why planning ahead is a vital part of maximizing your benefits. Here is where we will guide clients in defining the Return on Life they want in retirement as well as craft a life-centered plan to help them achieve their goals.
Crucial Claiming Decisions
In order to maximize Social Security benefits and your ROL retirement plan, two crucial claiming decisions must be made:
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. Waiting until full retirement age, on the other hand, will allow you to receive your full primary insurance amount, which is the full benefit that you have earned based on the amount you have paid into the Social Security system. If you do not need your benefit at this age, you can delay your claim. For each year that you delay, your benefit will increase by 8%, for a maximum possible increase of 32% 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 plan. In general, the lower-earning spouse may choose to begin collecting benefits 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
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, (6) at which point, if no changes are made, benefit payments may shrink to 80% of what Americans expect. (7)
The issues with the program are systemic and 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 is important to protect your ROL 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 that is only when it is combined with the support of pension benefits and withdrawals from savings. On its own, it simply cannot carry the weight of the average retirement plan.
Keep in mind that life-centered retirement planning encompasses more than just a solid understanding of your Social Security benefits. It also involves things like estate and legacy planning as well as tax management. If you do have additional resources to draw on during retirement, structuring a tax-efficient withdrawal strategy is important to ensure you are not paying more in taxes than you have to.
How We Can Help
Social Security is just one piece of the retirement puzzle, and you will have to look at all the components in order to see exactly where it fits. The best way to do this is by partnering with a financial professional. At Wellstone Wealth Management, we can help you build a solid ROL retirement plan that integrates each piece into a comprehensive whole.
If you are nearing retirement and have questions about how Social Security fits in, schedule a complimentary introductory meeting by contacting us at 503-594-1210 or firstname.lastname@example.org.
Greg Allen is a CERTIFIED FINANCIAL PLANNER™ professional, Life-Centered Financial Planner, Managing Member, and second-generation owner of Wellstone Wealth Management, a life-centered financial planning firm that takes a unique Return on Life (ROL) approach to help their clients live the best life possible with the money they have. With over 20 years of experience, Greg holds fast to his mission of helping clients plan their finances around their lives, instead of the other way around, resulting in fulfillment, confidence, and a meaningful life. Greg also provides a caring, trusted long-term relationship and life-centered financial behavioral counseling. He specializes in working with people who have recently retired or are close to it (typically five years or less) and relates well to corporate executives and upper-management couples who often have complicated financial pictures and need help maximizing their wealth, reducing their taxes, and preparing for retirement so they can maintain their ideal lifestyle.
When he is not helping his clients find meaning and purpose, you can find Greg spending time with his friends and family, especially his wife, Sandy, children, and grandchildren. As a native Oregonian, Greg loves the outdoors, visiting the Oregon Coast, and retreating to their family cabin in the mountains. He enjoys staying involved with his church, reading, watching sports, and anything to do with exercise and wellness. To learn more about Greg, connect with him on LinkedIn.
Information provided herein is provided by Wellstone Wealth Management, LLC. This information is for general informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Information was compiled from third-party sources believed to be reliable and accurate but cannot be guaranteed. Investment advisory services are offered through Oswego Wealth Advisors, Inc., an SEC Registered Investment Advisor. Neither Wellstone Wealth Management, LLC nor Oswego Wealth Advisors, Inc render any legal, accounting, or tax advice. All investments involve risk, are not guaranteed, and may lose value. We recommend that all investors consult with a qualified adviser to assess your personal situation before implementing any strategy.