By Brandon Miller, CFP–
There are so few guarantees in life – and they are usually bad. Dead. Taxes (at least for some of us). Your refrigerator will melt one month after the warranty ends. You can expect these things.
But what many people don’t expect is that Social Security will be there when they retire. And, as CNBC reported, the younger you are, the greater your skepticism about receiving that income stream. That’s a shame, because Social Security should be an essential part of your retirement strategy. Knowing that a fixed amount is guaranteed each month allows you to be more free with other investments.
First, let me calm the fears of all of you who don’t think you will benefit from this program that you have paid for all your working life. As you may have heard, there are many baby boomers who are retiring and paying fewer working people into the system, creating an imbalance between funding and payouts. But according to a recent study, anyone 55 and older can plan to take full advantage of it. Younger folks, well, the Social Security Administration estimates you’ll get 78% of your planned benefits in the worst case scenario. That’s still more than three out of four quarters, which isn’t a faint change.
In addition, Congress can act to close the funding gap before that shortfall occurs. Taxing incomes above the current $147k limit, reducing payouts to wealthier people, and increasing the age at which you start collecting are all potential, relatively simple solutions.
So instead of dismissing Social Security, I recommend understanding the role it can play in your retirement plans.
For starters, take a closer look at what this income stream means over your retirement years. Let’s say your monthly payout is $2,500. Every year that’s $30,000 in income. Collect 20 years of benefits and that’s $600,000. Live long enough to receive benefits for 30 years, and you will have received $900,000. Even at 78%, that’s $702,000. Like I said, not exactly a stupid change.
And under current and longstanding US policy, this is a guaranteed income. I cannot emphasize that enough. In addition, the amount you start with is only a base amount. You will receive an annual cost of living adjustment (COLA). For example, the rising inflation this year means that the COLA for 2022 is 5.9%. And COLAs are never negative. That increase and future growth will go together for the rest of your life.
Mind you, under current tax laws, Social Security benefits count as taxable income for most people, and tax rates are always changing. Nevertheless, anyone who qualifies can count on a steady source of income that he will not survive.
If you delay when you start collecting benefits, you will also increase your payout. While you can start collecting at age 62, that will be a much lower amount than if you wait until retirement age (67 for anyone born in 1960 or later) and receive full benefits. Each month you delay increases the amount you receive.
But wait, there’s more. If you can wait to collect until you are 70, you will receive more than your full benefit. To reward you for delaying your withdrawal, Uncle Sam gives you deferred retirement credits that go up to 8% per year. Your monthly income can then increase by more than 24% by waiting until your birthday cake contains 70 candles.
Obviously, your health, investments, and other factors influence your decision when to start receiving Social Security benefits. If you are married and both are eligible for benefits, consider a strategy such as taking the lower earners’ benefits at age 67 and the higher earners at age 70. Divorced people who were married for 10 years or more may be eligible for half of the ex’s benefit amount – without decreasing what the ex gets.
Paying extra into the system during your working life yields a nice payout once you retire. Waiting as long as possible to collect your benefits maximizes that amount, which also increases the impact of each COLA for you in real dollars. And don’t forget the magic of compounding.
Income that is insured for life and that adjusts to inflation. That’s a guarantee you can live with.
Brio does not provide tax or legal advice, and nothing in these materials should be construed as such. The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any person or on any specific security. It is only intended to provide information about the financial sector. Consult your financial advisor before investing to determine which investments are right for you. Past performance discussed during this program is not a guarantee of future performance. Referenced indices for comparison are unmanaged and cannot be invested directly. As always, remember that investing involves risks and possible loss of capital; seek advice from a certified professional.
Brio Financial Group is a registered investment advisor. SEC registration does not imply an endorsement of Brio by the SEC, nor does it indicate that Brio has attained any particular level of skill or ability. Advisory services are only offered to clients or potential clients where Brio Financial Group and its representatives are properly licensed or exempt from licensure. No advice should be given by Brio Financial Group unless a customer service agreement has been concluded.
Brandon Miller, CFP®, is a financial advisor at Brio Financial Group in San Francisco specializing in helping LGBT individuals and families plan and achieve their financial goals.
Published on January 13, 2022