When you think of retirement income, what comes to mind first? If you answered “Social Security,” you’re in good company. Most people consider this to be the primary source of retirement income—and they wouldn’t be wrong. But with all the conflicting information about how and when to retire, and what to do with your benefits, it’s hard to know where to start when planning for retirement. Claiming Social Security benefits is only one piece of the puzzle. You also need to consider things like your withdrawal strategy, other sources of income, or when you will be able to retire.
Social Security benefits can form anywhere from 30% to 90% of the average retiree’s post-retirement income, (1) so it’s crucial to understand how and to what extent Social Security fits into your full retirement plan. In this article, we will review the role Social Security plays in the average retirement plan, the current state of Social Security, and what you can do to maximize your 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, these components would be the legs holding up the seat, the foundational pillars, so to speak. Having all three “legs” is ideal, but it’s 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 won’t 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 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 the numbers: (4)
- Average 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 is $50,220 annually, or $4,185 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 $290 and $2,642 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:
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 you’ve 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 that you delay, your benefit will increase by 8%, for a maximum possible increase of 32% at age 70. (6)
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 early, 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, 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, (7) at which point, if no changes are made, benefit payments may shrink to 78% of what Americans expect. (8)
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
It’s more important than ever to protect your retirement plan, as we will see large decreases in benefits over the next 10 years. The best way to do this is by diversifying your retirement income streams and not relying only on Social Security benefits. While Social Security is a great source of income for many in retirement, it’s wise to combine it with the support of pension benefits and withdrawals from savings. On its own, it simply cannot carry the weight of the average American’s retirement costs.
Retirement planning is more than just understanding your Social Security benefits. It should be a holistic approach to managing your retirement savings accounts and planning for how you will utilize those funds after you stop working from your main source of employment. Having additional resources to draw on during retirement, as well as structuring a tax-efficient withdrawal strategy, are also important pieces of the retirement puzzle.
The best way to ensure you’re looking at the big picture of retirement, and that all the pieces fit together, is by partnering with a financial professional. At Premier Planning Group, we can help you build a solid retirement plan that integrates each piece into a comprehensive whole. If you are nearing retirement and have questions about how Social Security fits in, call our office at (443) 837-2520 or email my executive assistant, Talia Grover, at firstname.lastname@example.org to set up a complimentary consultation.
Brion Harris is the CEO, founder, and managing partner of Premier Planning Group, an independent financial firm specializing in working with pre-retirees and retirees, helping them create customized wealth preservation and retirement distribution strategies. With over 20 years of experience, Brion has developed deep knowledge and skill in helping his clients simplify their finances and find confidence in their financial future. Brion and the Premier Planning team are known for their unparalleled client service and their dedication to building long-lasting relationships with their clients. As a result, Brion has been the recipient of the #1 Advisor Leadership Award* at Summit for seven years running and has a reputation as one of the top retirement advisors in the business.
Brion is a proud 20-year resident of the Annapolis community, where he resides with his wife, Elizabeth, their three children, Addison, Jay, and Scarlett, and their two dogs, Pepper and Coco. When he’s not working, you can find him boating, skiing, traveling, and enjoying good food and music with his family. If you want to learn more about Brion, connect with him on LinkedIn.
*The #1 Advisor and Leadership award is based on production data and is awarded by the Summit Financial Networks region of Cetera Advisor Networks LLC. Brion Harris received the award in 2019, 2020, and 2021. This award is not a guarantee of future investment success. This recognition should not be construed as an endorsement of the advisor by any client.
The #1 Advisor and Leadership award was based on production data while at Summit Brokerage Services, Inc. Brion Harris received the award in 2015, 2016, 2017, and 2018. This award is not a guarantee of future investment success. This recognition should not be construed as an endorsement of the advisor by any client.