Closing in on retirement stirs important questions that might keep you up at night. One of the most critical questions is: How much income will you receive the rest of your life? You will include pensions, savings and retirement funds, along with the all-important social security check.
Add these resources together and the goal is to have enough money to live comfortably, without running out of money before you run out of life. Moving to a fixed income can be uncomfortable because you run the risk of being unable to increase income if the amount you have falls short or expenses are more than you anticipated. It is much easier to earn additional money earlier in retirement than it will be as you age.
With an estimated 10,000 seniors turning 65 each day for the next decade, these questions are weighing on the minds of millions looking at retirement just around the corner.
Importance of Social Security Income
The significance of social security it that it is a lifetime annuity. The amount you receive will be impacted by decisions you make at the time you elect to begin receiving benefits. You will then receive that amount, adjusted each year for inflation, the rest of your life. Whether you live to be 70 or 97, the payments will be consistent. Pensions generally operate as an annuity, if you are fortunate enough to have access to one.
Other types of retirement programs generally have a set balance. When that money has been spent, you are out of funds. Accounts like 401K’s and IRA’s fall into this category. These funds have the ability to provide a very comfortable retirement for those who have been able to set aside large amounts of money. Unfortunately the savings rate for these accounts is pretty dismal for a large percentage of those reaching retirement age.
Studies show that 29% of those over 55 do not have a pension or retirement savings. This means the social security may be their only income. For those with money in savings, the median balance for seniors 55 to 64 is a little over $100,000. For those who are between 65 and 74 it only increases to a median of $148,000. This only translates to between $310 and $649 dollars per month based on typical lifetime annuity rates¹. That is hardly enough to live off.
These statistics are sobering considering that social security income is expected to replace only about 40% of a workers monthly income, yet for 1/3 of seniors it will be the primary source of income for the household.² This makes the decision of when to begin receiving benefits a critical one that will impact your income for the remainder of your life.
Things to Consider When Deciding When to Receive Benefits
- Age you will begin receiving benefits. You can receive reduced benefits as early as age 62. Full retirement, where 100% of benefits are paid occurs between 66 and 67 years, depending on what year you were born. If you wait beyond your full retirement age you will receive a monthly increase of 8% for each year until you are 70 years old.
- What is your current health? If you are in good health you might expect to spend around 20 years in retirement. This could result in a small increase adding up to thousands of dollars over your lifetime. For a simple example, consider if you were to receive $1000 a month at full retirement and then lived 20 years in retirement you would receive $240,000 plus inflation adjustments. If you took early payments at age 62 you would receive around 25% less as a starting amount, though you would receive four additional years of income, bringing it to 24 years of payments. This initial payments of $750 per month would result in total payments of $216,000, $24,000 less than waiting until you reached full retirement age.
- What is your family’s history of aging? Predicting the future is always a guessing game. Using family history and current health can help you make an educated guess as to how long you will live. Family genetics plays a significant role in life expectancy.
- What are your personal financial circumstances? This takes the ideal financial numbers and connects them with the reality of your situation. Layoffs, illnesses and other circumstances can change your desired retirement age into a required retirement earlier than you may have anticipated. The less you have in savings, the more important it is to wait as long as possible to maximize your monthly payments.
- Do you plan to continue working? If you take social security payments early there are income limits that can impact your payments. Continuing to work can also increase monthly payments, because social security calculates your 35 highest earning years, which are often higher just before retirement.
- Minor Age Children might qualify to receive benefits until they are 18 or graduate from high school. This can increase overall benefits, but will permanently reduce the retirees benefit so the numbers should be carefully considered.
- Spouse benefits can be used to maximize payments. There are several strategies for spouses that can increase income while both spouses are collecting. When one spouse passes, the surviving spouse can take personal benefits or spousal benefits, whichever is greater?
Social security was first established when pensions were common and the benefit was meant to supplement other forms of income, not be the primary source for retirement funds. With a reduction in companies offering pensions, 401k accounts and social security are now often primary sources of retirement income.
The Impact of Your Age When Taking Social Security
Taking social security at age 62 will result in benefits being reduced by 25 to 30 percent, depending on the total number of months payments are received early. There is a convenient calculator from the Social Security Administration that will help you see how taking benefits early will impact your payment: http://www.ssa.gov/planners/retire/agereduction.html.
There is also an earning limit if you receive benefits early. For 2015 the threshold is $15,720. If you earn more than that amount, payments will be reduced by $1 dollar for every $2 dollars you earn. This can further reduce your payouts.
Taking benefits at full retirement age of 66 or 67, depending on your birth year, will result in 100% payouts. The income cap is also removed meaning you can receive benefits as you continue to work, if you choose.
Waiting beyond your full retirement age will increase benefits even further. You receive an 8% bonus for each year you wait between your full retirement age and 70 years old. After that time there are no additional benefits for waiting longer. This will result in the highest monthly payout, but payments over the shortest period of time.
The average male retiring today has a life expectancy of 84.3 years and females have a life expectancy of 86.6 years. 25% of those retiring today will live past 90 and 10% past the age of 95. When you decide to take social security will have a permanent impact on the quality of life you are able to achieve in retirement, so consider all of your options and life conditions carefully in order to maximize this important retirement benefit.