Should I Plan for Social Security Retirement Benefits?
When I am working with clients to project income and expenses in retirement, many of them don’t consider Social Security as part of the calculation, either because they don’t understand it’s benefits or don’t think it will be there for them. Let’s dive into both of these points.
How Social Security Works
Social Security is a wildly popular program that provides a monthly cash payment in retirement that is proportional to the amount you paid in during your working years. Remember that FICA line on your paystub that seemed like a mystery? These were your contributions. Your employer also contributed the same FICA amount on your behalf every year.
If you paid into Social Security, you are eligible for benefits in retirement. If you are (or were) married to someone who paid into Social Security you are also eligible for benefits. You can start collecting Social Security at age 62, although your payments increase for every year you delay taking benefits, up to age 70. If you were born in 1943 and 1959, your “normal” or full retirement age is 66. If you were born in 1960 or later, your full retirement age is 67. To review your earnings record and your current projection of Social Security benefits at age 62, 67, and 70, create an account and login at ssa.gov. Note that the projection you see is based on an average of your earnings over 35 years, indexing for the higher earning years. If you stop working before age 62 or move to a part-time role as you get older, you will pay in less FICA during these years and your future benefits will decrease.
Social Security is also there for you (or your kids) if you become disabled. Your monthly payment is based on your contributions at the time you became disabled, as well as a factor for your age.
Will Social Security Be There For Me?
Many of us have heard that Social Security will “run out of money” around the year 2033. What this date really signifies is the year that Social Security will pay out more in benefits (to older retired Americans living longer) than it will collect in FICA contributions (from current workers). While there will need to be a policy change to ensure that Social Security continues to be fully funded past that point, the widespread participation in Social Security makes it very likely that will happen. Over 57 million Americans are currently collecting Social Security retirement benefits and another 12 million people receive disability payments. When funding is needed to continue these payments, a small increase in FICA taxes or a decrease in benefits for wealthy Americans are two options the US government can enact to keep the program going.
Planning For Retirement Needs
Social Security was never meant to replace all of your income in retirement; the original intention was that Social Security would replace about 40% of your income. Because of this, it is up to you to save additional funds to draw upon later in your life. Many of my clients look at their retirement savings and wonder “am I on track?”. The answer to this question is specific to you and your lifestyle. To understand your own retirement income needs, track your current expenses for 3 to 6 months as a baseline. Most people assume that their expenses will be less in retirement, but studies show your expenses will be 85% to 90% of your pre-retirement level. Your expenses could be even higher post-retirement if you plan to buy a vacation home or travel extensively in your later years.
Once you have an estimate of living expenses in retirement, the real question is “how will I cover these expenses when I am no longer working?”. The answer will likely include multiple sources of income… Will you have a pension? Do you have IRAs or 401k accounts to draw from? Can you rely on interest or dividends from your investments? How about rental income?
At Smart Sister Finance we help people assemble this puzzle of retirement assets and income so they can understand if they are ready for retirement or need to make adjustments to achieve their vision for their golden years. We definitely include Social Security as one piece of the puzzle and encourage you to understand this important benefit as well.
Need help projecting your retirement needs? Book a free initial consultation here.