| We are facing a serious retirement income crisis. Most employers have shifted away from defined benefit pension plans in favor of defined contribution plans. In fact, in these tough economic times many employers have stopped making matching contributions to 401k accounts altogether. An entire generation has been deprived of retirement security which has been made worse by inadequate savings and the market crash of 2008.
Our spending, saving and investing problems are serious. To add insult to injury, many boomers who were counting on their home values as a backstop to their retirement plans have suffered widespread value destruction there too.
Social Security is going to be more important than ever.
Many boomers have been conditioned to believe that social security is not going to be there for them. Because of this many boomers did get busy and start saving for retirement. Baby boomers are in varying stages of retirement readiness. Some are already retired and sitting on a pile of assets. Some are still working and madly saving to make up for lost time. Some are blissfully plugging along, completely unaware of how they will finance two or three decades of living expenses once they are too old or sick or tired to work.
Regardless of where you stand with respect to retirement, what you need to know is that Social Security hasn’t gone broke. But because we discounted the Social Security system we have not learned all that we need to know about it in order to make informed decisions on how we can use the system to our advantage.
Let’s test your knowledge of the Social Security (SS) system by taking this quiz.
1. If you apply for SS benefits at age 62 what is the reduction in benefits?
2. If you are receiving reduced benefits at age 62 and work part time, how much can you earn before your benefits are reduced?
3. True or False? Once you reach full retirement age, it is impossible to accumulate higher benefits by working longer and earning more?
4. If Full Retirement Age (FRA) is age 66 and you decide to delay applying for SS benefits until age 70, the credit for each year you delay is what percentage?
5. True or False? A high-earning spouse, who is planning to wait until age 70 to apply so that he (or she) can maximize his benefit during his lifetime and for the widow after his death, may apply for his spousal benefit when he is 66?
Answers:
1. 25% permanent reduction in benefits.
2. You can earn up to $14,160 before your benefits would be reduced, over that limit and you will lose $1 of benefits for every $2 earned.
3. False, benefits are calculated based on a formula that takes into account the highest 35 years, any missing years will be filled in with zeroes. If a person has worked more than 35 years, only the 35 highest-earning years will be considered. Each of those 35 years of earnings is adjusted, or indexed, to reflect the change in general wage levels that occurred during the worker’s years of employment.
4. The answer is 8%. So if your FRA benefit was $2,000 at age 66 and you waited until age 70 to apply the benefit would have increased to $2640 and if you add the average cost of living adjustment (COLA) it would increase to $2948 per month.
5. True. Even if the benefit is only a few hundred dollars a month, it allows him or her to bring in a little extra money before claiming their own benefit at age 70.
This little quiz is just a small example of some of the intricacies of the Social Security system. There is no one-size-fits-all answer to the question of when a person should begin claiming Social Security benefits. There are many factors that factor in to the decision such as: working after filing for benefits, health status, life expectancy, marital status and other resources.
My goal as a financial planner is to help baby boomers approaching age 62 decide whether or not to apply for early Social Security benefits. Most people would be surprised how much the wrong decision can cost them over their lifetime.
Please call me to set up an appointment for your customized analysis of when you should consider applying for your Social Security benefits.
Source: The Financial Advisor’s Guide to Savvy Social Security Planning for Boomers by Elaine Floyd, CFP®
This column is produced by the Financial Planning Association, the membership organization for the financial planning community.
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