What Part Will Social Security Play in Your Retirement?

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Retirees drawing Social Security benefits received a 2.8 percent cost of living adjustment (COLA) in 2019. This is the largest COLA increase since 2011. Unfortunately, according to the AARP1, it will not be enough to cover many retirees’ rising healthcare and housing costs.

The 2.0% 2018 COLA increase raised the average monthly Social Security payment to $1,404 (annualized benefit of $16,8482). The 2019 COLA amounts to an average increase of $39.31 per month, a portion of which will be reclaimed by the increase in Medicare Part B & D monthly premiums.

For the 22.1 million people who are kept out of poverty due to their Social Security benefits3, a couple dollars extra per month may not be enough to cover other expenses that have also increased.

Maximize Social Security Benefits

The objective of retirement planning should be to maximize your Social Security benefits without becoming overly dependent on them. Many Americans have been paying into this program for most of their careers. Social Security consumes 6.2% of most worker’s paychecks while their employer matches another 6.2% of their income. These taxes paid can amount to $1 million or more over a lifetime of working.

One must first consider carefully when to begin drawing Social Security retirement benefits. The most popular age to start benefits is age 62. 42% of men and 48% of women chose this age. 90% of all Americans drawing retirement benefits began collecting at or before full retirement age4.

Age 62 may be the best age to draw benefits for some people, but surely not the majority. If you’re at the maximum taxable earnings limit and you retire in 2018, the most you can receive in monthly benefits at age 62, 65, and 70 is $2,158, $2,589, and $3,698, respectively5. The benefit at age 62 is only 58% of the amount it would be for a retiree waiting until age 70. A person who is in good health and has a family history of living into their late 80s could potentially draw greater benefits by waiting longer to start.

I spoke with a person recently following a speech I gave on planning for retirement. This person was recently divorced, age 60, and basically starting over with a small amount of savings. Her question was what steps she should take to maximize her retirement income. Fortunately, she had a good job that she liked. My advice – maximize savings, minimize expenses, and hold off drawing her Social Security until age 70.

Minimizing expenses will develop the skills necessary to keep spending in check. Ten years of savings will help grow a nest egg, but it cannot accomplish what a couple decades of compounded growth can do for someone younger.

This person may have another option. If she was married for at least 10 years, she is entitled to spousal benefits based on the ex-spouse’s work history. The benefit is equal to one-half of the ex-spouse’s full retirement amount if she waits until her full retirement age to start drawing the benefit. Full retirement age for someone born in 1958 is age 66 and 8 months. She would want to determine if this benefit is more or less than 100% of her benefit at age 70.

Don’t Depend on Social Security

Americans who have more time to plan for retirement should take note that Social Security is expected to have paid out more in 2018 than it took in6. Just what that means to future retirees remains to be seen. It’s unlikely Social Security benefits will disappear completely. But there is a reasonable probability they may pay less than promised. It would be pure speculation on how benefits might be reduced. The most prudent course of action would be to take control of your retirement by establishing your own retirement plan:

  • Utilize an employer sponsored retirement plan if one is available to you by maximizing contributions when you are able. These plans typically offer tax advantages when making contributions and many include valuable employer matching contributions.
  • Set up an IRA or Roth IRA and make the maximum contribution each year.
  • Save and invest money after-tax in a brokerage account. The account won’t provide immediate tax benefits. However, the investment return in the form of long-term capital gains or qualified dividends is taxed at a lower rate than pensions or retirement account withdrawals under current tax law.

Hopefully our politicians will find a way to preserve this important benefit for everyone. However, planning a successful retirement without the benefit would make it a bonus. Counting on Social Security for retirement only to find out the benefit has been changed significantly could take the gold out of your golden years.

Rick’s Tips:

  • Social Security benefits received a 2.8 percent COLA in 2019.
  • Medicare Part B & D monthly premiums usually increase by the same percentage as the Social Security COLA.
  • It may be prudent to plan retirement without Social Security now that it is paying out more in benefits than it collects in taxes each year.

1Social Security Benefit to Increase 2.8 Percent in 2019. by Harriet Edleson, AARP, October 11, 2018

2Source: Social Security Administration

3Source: Center on Budget and Policy Priorities

4Trends in Social Security Claiming. By Alicia H. Munnell and Anqi Chen, Center for Retirement Research at Boston College, May 2015.

5What’s the Maximum Social Security at Age 62, 65, or 70? By Todd Campbell, The Motley Fool, January 27, 2018.

6The 2018 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds

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