Financial planners are fond of using an image of a “three-legged stool” when they talk about retirement planning, with the three legs consisting of an employer pension, Social Security, and personal savings.
With employer pensions becoming rarer, and personal savings rates not being what they should be, you would think that people would pay a lot more attention to the remaining leg. After all, for most people, Social Security will be the only source of guaranteed income once they stop working. Yet it turns out that Social Security is one of the more misunderstood tools in a retiree’s toolkit.
For example, most people know that the longer you wait to collect Social Security, the higher your benefit. The earliest age that most people can collect their benefits is 62, though doing so will usually result in a 25% or so decrease in the amount that most baby boomers will receive. (“Baby boomers” are defined as folks born between 1943 and 1954, or for whom Full Retirement Age for Social Security purposes is 66.) According to a report from the Congressional Research Service, in 2011, 59% of people claiming Social Security for the first time were between ages 62 and 64. These early claimers locked in lower benefits for their entire lifetime.
It gets worse. A recent survey conducted by Securian Financial Group asked more than 800 baby boomers how and when they would claim Social Security benefits, and over 80% said they hadn’t yet made plans or were just beginning to explore their options. Of that 80%, about half believed that Social Security would account for 40% or more of their retirement income, while 17% expected no retirement income from Social Security at all!
Just like with any element of your financial picture, Woodward Financial Advisors thinks it’s important to look at Social Security claiming strategies from a number of angles. Claiming early may make sense if you are in poor health or have limited availability of liquid assets. But for most people, the math favors waiting to claim a benefit. This is particularly true for married couples where one spouse has significantly higher lifetime earnings, due to the rules around spousal and survivor benefits.
That’s why it’s critical to start thinking about Social Security strategies well before retirement. By incorporating those strategies into your long-term financial plan, we can make your retirement stool a little bit sturdier.
Incidentally, we covered some of these topics in our Social Security Boot Camp last September, as well as recently for the Durham Orange Estate Planning Council. If you think your workplace or community group could benefit from learning more about Social Security, please contact us to talk about our speaking availability.