When you think about Social Security, what comes to mind? Do you worry if it will still be around for you when you retire? Do you wonder how much you can expect to receive each month? Are you aware of when you can start taking your benefit, or what you can do to maximize it?
If you feel confused or unsure about Social Security, you’re not alone. According to Nationwide Retirement Institute’s “2019 Annual Consumer Survey on Social Security”:
Less than 25% of people know what their full retirement age is
70% think they are eligible for full benefits before they actually are
Workers within 10 years of retirement overestimate their monthly retirement benefit by almost 30%
Will Social Security Still Be There for You When You Retire?
There are many pessimistic news stories out there about Social Security’s future. “Going bankrupt” and “running out of money” are common headlines. And, according to a 2019 Gallup Poll1, 67% of Americans say they worry about Social Security either “a great deal” or “a fair amount.”
Here’s what’s happening
Social Security benefits are considered a “pay as you go” system. This means that Social Security taxes collected from today’s workers goes to pay today’s retirees. For many years, more workers paid in taxes than the system needed to pay out to retirees at the same time. More money came in than went out, and the excess started to accumulate in a trust fund that reached $2.9 trillion at the end of 20182.
But now, due mostly to the large number of Baby Boomers who will continue to retire over the next several years, the worker to retiree ratio has started to shift. Soon, we’ll reach a point where there is not enough money coming into the system to pay out to all the people claiming benefits. To make up this shortfall, the Social Security Administration will begin pulling money from the trust fund.
The Social Security Administration projects that the current trust fund balance will only last until 2035. Once it’s depleted, benefits can only be paid directly from Social Security taxes collected from the current workforce. The projections show that will only generate about 75% of what’s needed to pay all benefits2.
The Social Security Board of Trustees believes the most likely adjustments will come in the form of a reduction in benefits or an increase in taxes (or some combination of both). But Social Security will not go away.
When can you claim benefits?
When it comes time to begin receiving Social Security benefits, you have a range of options. You can begin receiving benefits anytime between ages 62 and 70. Your full retirement age is the age at which you can begin receiving 100% of your primary insurance amount (PIA), also known as your full retirement age benefit. Your full retirement age depends on your year of birth. For example, for those born in 1960 or later, the full retirement age is 67.
What Are the Trade-Offs If You File Earlier Versus Later?
If you file at an age other than your full retirement age, your benefit amount will be reduced or increased. Filing earlier gives you a reduced benefit. Filing later gives you an increased benefit. For someone with a full retirement age of 67, here is what you can expect, based on the age you actually file for benefits:
Here are some reasons you might want to claim benefits later:
- You don’t need the money right now, or have income from other sources to tide you over (such as a pension or 401(k) plan)
- You believe you have a longer life expectancy, during which higher payments would be helpful
- You plan to work at some level during retirement
- You simply like the idea of getting higher benefits over the long term
Should you take benefits earlier or later?
Everyone’s situation is unique, so it’s important to look closely at the trade-offs before making your decision. Here are some reasons you might want to claim benefits earlier:
- You simply need the money to help pay living expenses
- You cannot work longer due to health reasons
- You have caregiving responsibilities for a family member
- You have been laid off or lost your job through downsizing or other action
Moving Forward with Your Social Security Planning
When it comes to planning ahead for Social Security, there’s a lot to know and understand. And many details are bound to change over time. Here are some tips to help you stay on top of Social Security and prepare yourself to make the best decisions for your financial future.
Continue to increase your knowledge
Be sure to check out these valuable resources you can access to help increase your knowledge about Social Security:
- AARP’s Social Security Resource Center (www.aarp.org/retirement/social-security)
- Social Security Planner (www.ssa.gov/planners)
- “Social Security Basics: 9 Essentials that Everyone Should Know”, by Devin Carroll (available via Amazon or other online book sellers)
- “Social Security Made Simple”, by Mike Piper, CPA (available via Amazon or other online book sellers)
Keep a big picture perspective
According to the Social Security Administration, Social Security benefits will replace about 40% of an average employee’s pre-retirement income after retirement. This replacement percentage will be lower for people in upper income brackets and higher for people in lower income brackets. In addition, most financial advisers say that a typical person will need about 75-80% of their pre-retirement earnings to comfortably maintain their pre-retirement standard of living. That means that Social Security will provide about half of what the average person will need. How can you make up the difference?
- Make sure you are saving as much as you can in any 401(k) or other employer-sponsored retirement plan available to you. Aim to save at least enough to receive the maximum employer matching contribution (if available).
- If you are self-employed, save as much as you can in an IRA account.
Consider working with a financial professional
You may want to consider working with a financial professional to help you prepare to make the best decisions when it comes to Social Security. Your LPL Financial Professional can be a valuable resource for this and other financial planning issues. Here’s how they can help you:
- Work with you to develop financial goals based on
your needs and desires
- Develop an investment strategy to help you fund
- Help you better understand what’s happening in the market and how it can affect your investment strategy
- Meet with you on a regular basis to track progress and make adjustments as necessary
The financial professional edge
According to Nationwide Retirement Institute’s “2019 Annual Consumer Survey on Social Security,” retirees working with a financial professional report receiving 17% more in monthly benefits than those who do not ($1,551 vs. $1,324). In addition, they report being much more able to do the things they want in retirement (90% vs. 56%).