By Brian Bloxom, ChFEBCSM
Are you counting down the days until you get to finally enjoy the sweet freedom of retirement? Naturally, though, with a large life transition like this, there is so much to consider and plan for. A big piece of this puzzle is Social Security. You’ve paid into it for years, but how will it fit in with the rest of your retirement plan? Understanding the how and the when of benefiting from Social Security can be complex.
With post-retirement income ranging from 30% to a whopping 90% or more, the importance of understanding how Social Security fits into your retirement plan cannot be overstated. Today let’s delve into the intricate role that Social Security plays in an average retirement plan, shed light on the current state of Social Security, and equip you with some valuable strategies to optimize and maximize your benefits.
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 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.
Are you part of the majority of Americans who won’t be able to rely on a pension? Without proper planning, your Social Security plays an even bigger role in your retirement plan, and chances are that it won’t 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.
Let’s take a look at today’s numbers:
- 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
The average cost of retirement for retirees between the ages of 65-74 is $53,916 annually, or $4,495 per month. 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 $301 and $2,131 per month!
It’s easy to see just how big of an impact Social Security can make on your retirement plan, which is why planning ahead is a vital part of maximizing your benefits.
Crucial Claiming Decisions
Planning ahead involves understanding two important claiming decisions that can help to optimize your total lifetime benefit:
1. 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.
2. 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 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 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 to Match Your Needs
As we look ahead to the future, it becomes increasingly crucial to safeguard your retirement plan from potential challenges. With projections showing a significant decrease in Social Security benefits in just a decade, it’s vital to avoid relying solely on this program as your primary source of income during retirement. While Social Security serves as a valuable pillar in retirement planning, it is often insufficient to bear the full weight of the average American’s retirement expenses.
Diversifying your income sources and exploring additional avenues of financial support is key to building a resilient retirement plan. By supplementing Social Security with other income streams, such as personal savings, investments, and retirement accounts, you can create a more stable financial foundation for your retirement years. It’s important to understand that Social Security is just one of the many steps you can take for a solid retirement.
If you’re feeling overwhelmed by all the information and decisions around your retirement plan, don’t be. Sure, it can be complex, but you don’t have to make these decisions and go on this journey alone. When you partner with a financial advisor who takes the time to understand your story and tie it with the right plan, it’s a game-changer.
At Sentinel Wealth Partners, we believe retirement is the most important planning you’ll do in your life, and we want to lend a hand to discover all the possibilities for your unique situation. Reach out to us today by calling our office at 703-832-0164, sending an email to [email protected], or using our online calendar.
About Brian
Brian Bloxom is an Independent Financial Advisor, Chartered Federal Employee Benefits ConsultantSM (ChFEBCSM) and Chartered Retirement Planning Counselor℠, CRPC® professional with 25 years of experience in financial advising. He founded Sentinel Wealth Partners to serve retirees, individuals approaching retirement, and individuals managing complex retirement plans such as company plans or federal benefits plans. His expertise and dedication to helping his clients achieve their goals make him a trusted resource that will help you feel confident in your customized retirement plan. Brian’s mission is to be available to his clients—all the time. He’s here to solve your problems, relieve your anxiety, and give you optimism for retirement. Because ultimately, your retirement should be about well-deserved enjoyment, and not about stress or anxiety. When he’s not working, you can find Brian spending time with his wife, Jessica, and their two sons, Spencer and Preston. He enjoys coaching soccer, serving in his community, golfing, and relaxing at his vacation home at Lake Anna, VA. To learn more about Brian, connect with him on LinkedIn.
“Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Sentinel Wealth Partners and Cambridge are not affiliated. Sentinel Wealth Partners is not engaged in the securities business. Cambridge does not offer tax or legal advice.”