Five Truths About the Money Coming Your Way: If you’re looking to bust some myths – and who doesn’t like a good myth-busting exercise now and then – let me suggest that you look no further than the dialogue in the U.S. swirling around Social Security. What are some of the biggest fairytales experts hear all the time?
If you have an ex-spouse drawing on your Social Security benefits, it diminishes your own. Working in retirement means a permanent loss of your benefits. And the grand poohbah of them all: Social Security is going broke.
All patently false (we’ll get to why below) but also incredibly problematic. Why? The degree to which Americans are relying on this important benefit to get them through retirement cannot be overstated.
According to the 2023 Protected Retirement Income and Planning study (PRIP) of 2,500 consumers age 45 to 75 from the Alliance for Lifetime Income and Cannex, 73% of consumers surveyed are counting on Social Security income in retirement. In fact, 40% say Social Security will be or is a critical part of their retirement income. It’s even more important for Peak 65 women (age 61-65), 54% of whom have less than $100,000 in assets compared to 48% of Peak 65 men. And, half of all the individuals in the Peak 65 group say Social Security is or will be a critical part of their retirement income.
For all of these reasons, decisions around Social Security – including the uber one about when to claim your benefits – are ones you need to get right. Getting them wrong means leaving valuable dollars that you’ve earned on the table. Sometimes hundreds of thousands of them. And the fact that all of this incorrect information continues to swirl leads many to do the opposite. That’s the take of Jason Fichtner, PhD, vice president and chief economist at the Bipartisan Policy Center and a Senior Fellow with the Alliance for Lifetime Income and Head of the Retirement Income Institute. “One size doesn’t fit all,” he says. Marcia Mantell, CEO of Mantell Retirement Consulting and author of What’s The Deal With Social Security For Women agrees. “People are failing with Social Security,” she says.
But there are ways to get it right. And that starts with understanding some basic truths about the program. Here are five.
1. Social Security Is Not Going Broke (Or Bankrupt)
That’s not to say it isn’t under financial pressure, but here’s the real story. If the government takes no action, then by the year 2033, Social Security will only be able to pay out what it collects in annual revenues, which is mostly from payroll taxes. In practice, what that means is that – if everyone gets the same reduction in benefits – you will only receive 75%(ish) of the full amount of your predicted benefits. How likely is that scenario to play out? “Not at all,” says Mantell. Fichtner agrees that the government will likely take action – but notes that the actions it can take are getting more limited by the year. “It will likely be some combination of increasing the payroll tax and reducing benefits,” he says. “[Unfortunately,] for people in their 20s and 30s any changes mean they’ll be hit twice. They’ll have to pay higher taxes and they’ll receive less in benefits when they retire.”
2. It Isn’t Going To Cover The Lifestyle You Need and Want in Retirement (It Was Never Meant To)
The full name of the Social Security program is the Old Age & Survivors Insurance Trust fund, Fichtner points out. It was never meant to replace your paycheck in retirement, it was meant to provide a bare minimum standard of living and insure against outliving your savings in old age. “It was never meant for anything other than food on the table, a roof over your head and not a fancy roof,” says Mantell. “That is still the case. It’s a safety net that protects you from falling into poverty.” By the numbers, it replaces about 40% of an average earner’s pre-retirement pay in retirement. But what many people don’t understand is that the more you earn the less, percentage wise, Social Security replaces. Replacing the rest is your job. So, log onto https://www.ssa.gov/myaccount/ and check your earnings history (if there are mistakes, take the steps to fix them now) and your projected benefits. Then, increase your own rate of savings (preferably of the tax-advantaged sort) so that you’re saving at least 15% on a consistent basis (including matching dollars) for your long-term needs. If you’re not there yet, don’t panic. Instead, nudge your savings up by 2% every year or every time you get a raise (or both) until you hit the mark.
3. Take It If You Need It (But Wait If You Can)
The best way to make sure that you get the biggest monthly check possible from Social Security is to delay taking benefits. “If you’re 62 and you really need the income, take it,” says Fichtner. “If you don’t, delay. You get roughly an 8% increase in benefits for every year you wait from age 62 to 70. Overall, if you can wait the full time period until age 70, it’s about a 77% increase over your age-62 monthly benefit amount.” That said, there are wrinkles which are specific to your individual situation (remember, one size doesn’t fit all.) Married couples, for example, need to plan for both of their lives. If you can delay the benefit of the higher earner (even if you start the benefits of the lower earner to tide you over), you’ll be able to count on those higher monthly benefits going forward. And should that higher earner die first (as is often the case when the higher earner is a man), his spouse can step into his shoes and receive either this benefit or her own, whichever is then higher, for life.
4. You Can Continue to Work (Without Long-term Penalty)
If you take Social Security before your full retirement age (of 66 or 67 depending on when you were born) and you continue to earn money, some of your benefits may be withheld. (In 2023, for every dollar earned above $21,240, your Social Security will be reduced by $1 for every $2 earned.) This is called the Retirement Earnings Test. The reduction is temporary. When you hit full retirement age, you’ll receive that money back in the form of a higher monthly benefit. We know working keeps people happier, healthier and social – all good things. So don’t let this myth stop you from continuing to earn.
5. The Social Security Administration Answers Questions (But Doesn’t Give Advice)
For a two-income couple with one higher earner and one lower earner, the average lifetime value of Social Security payments is over $1 million dollars. In other words – it’s a lot. If you have questions, by all means ask them. You can call your local Social Security field office and try to make an appointment. Be prepared to wait, both on the phone and then again to get time on the calendar. But know, the agents in the office are, as Mantell says, “order takers.” If you need to start your benefits, they’ll get you into the system. What they won’t do is give you advice about when starting your benefits makes the most financial sense for you. For that, you’ll want to consult a financial advisor.
When it comes to planning for and living in retirement, there are only three forms of protected lifetime income available – Social Security, pensions, and annuities. Since pensions have basically disappeared, decisions about how and when to claim Social Security are more important than ever before.
And, if you’re like millions of Americans who find themselves facing a gap in protected lifetime income – money that helps cover your basic monthly expenses in retirement – consider talking with your advisor about how an annuity could help fill that gap.