By Darren Wurz
Retirement is just a few years away, so Social Security is on your mind. With all the information out there about how and when to retire, and what to do with your benefits, it’s a challenge to keep it all straight. You know that you have paid into the Social Security system and that you’ll be able to claim benefits at some point, but do you know the ins and outs of your withdrawal strategy? Or when is the best time to take your benefits?
With benefits that can make up anywhere from 30% to 90% of the average retiree’s post-retirement income, (1) it’s crucial to understand how and to what extent Social Security fits into your full retirement plan. In this guide, we’ll review the role Social Security plays in the average retirement plan, the current state of Social Security, and what you can do to maximize your benefits.
The Three Pillars of Retirement
There are three main components to most retirement plans: Social Security, pension benefits, and withdrawals from savings. Like a stool that needs at least three legs to stand up, having all three of these components is ideal, but it’s not always realistic. Pensions are becoming less and less common as employers have shifted toward other forms of deferred compensation. In fact, only about 31% of Americans will retire with pension benefits at all, (2) and recent reports suggest that only 7% will retire with all three retirement pillars. (3)
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: (4)
- Average benefit payment at age 62: $1,543 per month
- Maximum benefit at full retirement age: $3,011 per month
- Maximum benefit payment if you wait until age 70: $3,895 per month
The average cost of retirement is $50,220 annually, or $4,185 per month. (5) When 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 $290 and $2,642 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, while waiting until full retirement age will allow you to receive your full primary insurance amount, which is the full benefit that 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 that 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. Generally, it may be wise for the lower-earning spouse to begin collecting benefits early, while the higher-earning spouse waits 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. However, everyone’s circumstances and what is best for you will depend on your unique situation.
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 properly plan for retirement. Unfortunately, there are many problems with the current system that make projecting long-term benefits more difficult. Recent estimates suggest that the program may run out of funding by 2034, (6) at which point, if no changes are made, benefit payments may shrink to 78% of what Americans expect. (7)
The issues with the program are systemic and range from persistently low interest rates and collectively longer retirements, to significantly more beneficiaries and not enough workers contributing to the fund. Taken as a whole, these factors indicate that the Social Security system is currently underfunded and may not be earning enough to pay its obligations.
Social Security & Your Retirement Plan
With the potential problems in the Social Security system, it’s important to protect your retirement plan by ensuring that Social Security is not your only source of income. Sure, Social Security acts as a great pillar for retirement—but on its own, it may not be able to carry the weight of the average American’s retirement costs.
For this reason, retirement planning encompasses more than just a solid understanding of your Social Security benefits. You need to make sure that you have a robust investment strategy with the right amount of potential return and risk so that your investments will be able to provide sufficient income to supplement your Social Security. Carefully balancing risk and reward is critical to not running out of money. You also need to plan for a tax-efficient withdrawal strategy to make sure you are not paying more in taxes than you have to.
Social Security is just one piece of the retirement puzzle, and you have to look at all components of the big picture to see exactly where it fits. The best way to do this is by partnering with a financial professional.
Wurz Financial Services specializes in helping attorneys and law firm owners like you maximize their wealth on the path to retirement and financial independence. We can help you build a solid retirement plan that integrates each piece into a comprehensive whole. If you have questions about how Social Security fits into your retirement plan, reach out to us to schedule a no-obligation consultation.
Let’s find out if we’re the right people for you to depend upon during your journey to a comfortable retirement. Contact us at 859-291-9879 or email@example.com today!
Also, join us at one or all of our free webinars:
- Social Security 101: The 3 Rules to Maximize Your Lifetime Retirement Benefits!
- Will I Have Enough to Retire?
- Retirement Planning Strategies for Solo & Small Firm Attorneys
Darren Wurz is a fee-based financial advisor and co-owner of Wurz Financial Services, where he operates the Northern Kentucky/Cincinnati office. He is a CERTIFIED FINANCIAL PLANNER™ and has a master’s degree in financial planning from Golden Gate University. Darren specializes in serving the unique financial planning needs of attorneys and law firm owners. He is the host of The Lawyer Millionaire Podcast and author of The Lawyer Millionaire: The Complete Guide for Attorneys on Maximizing Wealth, Minimizing Taxes, and Retiring with Confidence, published by the American Bar Association.
Darren is a member of the American Bar Association and the Financial Planning Association. He is also active in his local community as a member of the Northern Kentucky Bar Association, Covington Business Council, and Northern Kentucky Chamber of Commerce. To learn more about Darren, connect with him on LinkedIn.