By The Welch Group
Retirement planning can be an overwhelming process, and understanding Social Security can be a big part of that. Thankfully, there are resources to help you comprehend what Social Security is and how it fits into your retirement plan. Social Security benefits can be an important part of your post-retirement income, so it’s beneficial to understand how and when to claim benefits and what to do with them.
The following guide will provide you with an overview of the role Social Security plays in the average retirement plan, the current state of Social Security, and tips for maximizing your benefits. With this information, you can make an informed and effective retirement plan that works best for you.
The Three-Legged Stool
There are three main components to most retirement plans: Social Security, pension benefits, and withdrawals from savings. If retirement were a stool, these components would be the legs holding up the seat.
Having all three “legs” is ideal, but it’s not always realistic. Pensions have become less and less common as employers shift toward other forms of deferred compensation and only about 31% of Americans will retire with pension benefits at all. Another report suggests that only 7% will retire with all three retirement legs.
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:
- Maximum 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 for retirees between the ages of 65-74 is $53,916 annually, or $4,495 per month. 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:
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,
- Waiting until full retirement age will allow you to receive your full primary insurance amount, which is the full benefit 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%, for a maximum possible increase of 32% at age 70.
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 plan for retirement properly. 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 2035, at which point, if no changes are made, benefit payments may shrink to 80% of what Americans expect.
The issues with the program are systemic and indicate that the Social Security system is currently underfunded and not earning enough to pay off its obligations.
Planning Your Retirement With Social Security
It’s important to remember that Social Security can be an important piece of the puzzle when it comes to planning for retirement, but it shouldn’t be the only source of income. Designing your financial future may also include having a pension, withdrawals from savings, and a tax-efficient withdrawal strategy. Doing so can help you reduce the amount of taxes you will pay and make the most of your retirement savings. It’s essential to consider all these pieces when planning for retirement so you can ensure you have the necessary resources to support yourself in this season of life.
As you prepare for everything needed for a comfortable retirement, it’s helpful to get support from a trusted financial professional who can help you create a comprehensive plan. At The Welch Group, we specialize in helping people of all ages build retirement plans that make the most of their resources and help increase their long-term financial security. If you’re nearing retirement and have questions about how Social Security fits into the equation, reach out to us today by scheduling an introductory phone call at 205-879-5001.
About The Welch Group
The Welch Group is a fee-only, employee-owned wealth management firm committed to enriching the lives of their clients. Founded in 1984, The Welch Group helped pioneer the fee-only financial planning and investment management movement and has continued to put the needs of clients first ever since. Offering wealth management and family office services to retirees and young professionals, The Welch Group team strives to simplify financial management and help clients secure their financial future so they can focus on what matters most. Our personalized and comprehensive approach helps clients plan for their goals, needs, and concerns, including estate planning, cash flow, charitable and tax planning, and retirement strategies.
As financial advocates, the financial advising team is made up of educated, experienced, and dedicated professionals, including Certified Public Accountants, a Juris Doctorate (JD), individuals with MBA degrees, and CERTIFIED FINANCIAL PLANNER™, Accredited Estate Planner®, and Chartered Financial Analyst® professionals. The Welch Group is passionate about giving back, creating positive ripple effects in our community by supporting local charitable organizations through The Welch Group Foundation. To learn more about what we do and how we can help, explore our website and schedule a complimentary consultation.
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