When you’re saving money for retirement, there are three key risks:
- Inflation, or the risk that rising prices could erode the value of your nest egg.
- Longevity, or the risk that you’ll outlive your investments.
- Market decline, or the risk that a downturn could compromise your long-term savings.
“Social Security is uniquely positioned to hedge against all three of these risks,” says Robert Aruldoss, a senior financial planning analyst at the Schwab Center for Financial Research. “It’s something that’s very difficult to replicate.”
That’s because Social Security is:
- Indexed to inflation.
- Guaranteed for as long as you live.
- Unrelated to the fate of the financial markets.
The maximum monthly Social Security check for someone at full retirement age (currently 66 but rising to 67 for those born in 1960 or later1) is $2,788, or $33,456 a year—and that’s for those lucky enough to have earned significant sums during the 35-year span the Social Security Administration relies on to calculate your payout. The average is just half that, or $1,404 a month.2
Given these numbers, it’s unlikely that Social Security will ever be more than a piece of the retirement puzzle, at least for those wanting to maintain anything close to their current lifestyle (see “How far will Social Security get me?”).
That said, there are strategies for maximizing it—assuming you’re eligible at all. There are also unique considerations for married couples—to say nothing of other potential beneficiaries. And then there’s the question looming above it all: “How secure is Social Security?”
For the answers, read on.
Who’s eligible for Social Security, anyway?
To qualify for Social Security, you need to have paid the Social Security payroll tax for a total of 10 years—or be married to someone who has (a nonworking spouse is eligible for his or her own benefit equal to up to half of a spouse’s benefit).
That said, 4% of all retirement-age Americans will never receive Social Security benefits—including career government workers whose jobs include a pension and those who never established the required work history, such as an unmarried person with little to no employment record or an immigrant who arrived to the United States late in life.
How can I increase my benefit?
Although you can start collecting a reduced benefit as early as 62, even the full retirement age of 66 or 67 is a bit of a false summit since those who continue to wait accrue even more. Indeed, the longer you put off collecting past your full retirement age, the bigger your check will be—to the tune of about 8% a year. That means if you wait until 70, after which there is no incremental benefit, you’ll collect from 24% to 32% more than if you had begun collecting at your full retirement age—and roughly 76% more than if you had begun collecting at 62.
Of course, waiting works only if you have enough money in the meantime and if you or your spouse expects to live reasonably far into the future (see “When waiting pays off,” below). Those in poor health, for example, might decide to take Social Security as soon as possible—and they wouldn’t be alone. According to the Center for Retirement Research at Boston College, 48% of women and 42% of men begin collecting at age 62.
Assuming you can afford it, however, waiting can be smart—even if that means downing your savings. “Because you can’t outlive Social Security and it can’t be eaten up by inflation, it’s to your great advantage to maximize your benefit,” says Rob Williams, director of income planning at the Schwab Center for Financial Research.
How secure is Social Security?
Those who have not yet begun to collect their benefits may be wondering, “Will Social Security be there for me?”
The current surplus of $3 trillion in the two Social Security trust funds—the Old-Age and Survivors Insurance Trust Fund, which pays retirement and survivors benefits, and the Disability Insurance Trust Fund, which pays disability benefits—will be exhausted by 2034, all things being equal.
However, “exhausted” is a relative term. According to the Social Security Administration, some benefits could be paid even if the trust funds are depleted. In fact, the trust funds’ annual income is projected to equal about 79% of the program’s cost even if the reserve were to be fully depleted.
“What I tell clients is, ‘It will be there for you—but there may be some changes,’” says Robert. That could mean later retirement dates for future recipients, reduced benefits for retirees who can afford it or increases to the Social Security payroll tax in order to raise more money.
“Lawmakers may well do something in each of those three categories,” says Nancy Cresswell, an associate financial planner at Schwab Private Client Investment Advisory, who adds it’s unlikely that benefits would go away entirely. “Of course, if you’re worried about potential changes, there’s one sensible way to try to hedge against that risk,” she says: “Save more.”
What’s the best strategy for spouses?
“Many clients come to us and say, ‘I want to start taking Social Security right away,’” Nancy says. “But one thing they might not be considering is how a married person’s decision affects her or his spouse.”
For example, primary earners may be eligible for a significantly larger benefit than their partners. In those instances, it often makes sense to collect the lesser of the two benefits early while allowing the other to grow. That’s because after the death of one spouse, the surviving spouse receives the larger of the two benefits for the remainder of his or her lifetime.
“I often suggest that clients think through a worst-case scenario in which one of the two checks goes away,” Nancy says. “How much difference might it make for the surviving spouse, having maximized the benefit?”
Can my benefit be passed on?
It’s not just a spouse who can benefit from the Social Security you’ve earned. Dependent children and even grandchildren may also be eligible if they are under 18 when a Social Security recipient dies, becomes disabled or retires. And disabled children of any age may qualify if they were disabled before the age of 22. However, “the rules, especially around disability, are complicated,” cautions Nancy, who recommends consulting the appropriate benefit specialists at the Social Security Administration.
How is my benefit amount determined?
Because the benefit formula is based on an indexed average annual income of your 35 highest-earning years, the more you earn over your lifetime, the more you can expect to receive from Social Security. That said, earnings above a certain level—$128,400 in 2018—won’t yield a bigger benefit, although neither will you pay the 6.2% Social Security payroll tax on income above that threshold.
By design, this benefit formula favors the less wealthy, since lower earners see a higher percentage of their income replaced by Social Security, even if their overall benefit is less.
Although there’s not much you can do to revise your earnings history, continuing to work can be beneficial in two ways. One, if you don’t yet have 35 years of income history, every additional year you work replaces a zero-income. And two, if you’re at or near your peak income, every additional year could replace a year in which your earnings were lower. Hence, in both cases, working longer could significantly boost your benefit.
How far will Social Security get me?
Begun under President Franklin Roosevelt in 1935, Social Security paid retirees some $793 billion in 2017. But that titanic figure belies a little-known truth: The program replaces only about 40% of a middle-income earner’s paycheck, with the remainder coming from earnings, pensions and savings. (For those in upper-income tax brackets, the figure is even less.)
However, with only a fifth of those 65 and older working at least part-time and pensions in precipitous decline, the pressure has never been greater to supplement Social Security with personal savings. (Just 35% of Fortune 1000 companies sponsored actively accruing plans in 2011, down from 59% in 2004.)
“Today, there’s a greater individual burden than ever before to save for retirement,” says Nancy, who notes that clients request consultations on Social Security more than any other topic. “It’s important to fully understand your Social Security benefit, but also important to understand that it was never intended to be your sole source of retirement income.”
1To find out yours, visit https://www.ssa.gov/planners/retire/retirechart.html.
2Data as of 01/2018.
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