Saving for retirement: Putting Social Security numbers into context

Planning for retirement is instrumental to achieving retirement readiness

As a 401(k) plan sponsor and business owner you help participants in retirement plans set and meet their retirement goals.  Everyone, regardless of age, needs to understand some of the basics of Social Security. Once they do, the importance of saving in a retirement plan becomes apparent.

Follow these 5 tips for retirement readiness:

Tip 1: Take a look at Social Security benefits. One benefit of looking at Social Security early in a career is it can raise awareness of the importance of joining the employer’s retirement plan and making sure to contribute in amounts significant enough to ensure retirement readiness at the end of a career.

Tip 2:  Work with a trusted advisor. The advisor can help set retirement goals and work to create a plan for the participant to follow. Careful monitoring, over a career, can help make sure participants stay on track.

Tip 3:  Periodically buy another year of retirement. Increasing contributions will help make sure an employee is ready for retirement as they age into their 60s and beyond.

Tip 4: Track retirement readiness. It’s important for a participant to track their retirement readiness if they want to achieve a successful retirement after a long career.

Tip 5: Begin saving for retirement early and make regular contributions. The sooner you enter and contribute to your employer’s plan leads to one of the most powerful features of any retirement plan, the ability for returns to compound over many years. Increase your contributions as needed then let the returns compound over a period of years. This will provide the likeliest path to retirement success.

Tailoring a sufficient retirement plan balance with the right Social Security strategy can boost the chances of a participant not outliving their money. See if your retirement goals are in line with your social security benefits: Calculate my retirement.

Social Security and life expectancy: Finding the breakeven point

The number one concern in retirement for most retirees is to make sure their money outlives them and not the other way around. The first thing a participant should consider is their life expectancy. Social Security was originally designed to be neutral to a recipient in the amounts received regardless of when the recipient decided to take their benefit. The assumption was someone taking it early would receive a lesser amount for a longer period of time while someone who waited, would receive a higher benefit for a shorter period of time. In the end, the total benefits paid would equal out under a typical life expectancy. Depending on the recipient’s status (single, married, widow, etc.), the breakeven point is typically in the 77 to 80 years of age range.

In today’s world with much longer life expectancy this does not necessarily work out to be the case. A person living beyond the breakeven point can receive a much larger amount by delaying the start of their benefit verses someone who claims at age 62. For a person who lives past age 85 for instance, this could be a significant sum of money.

Putting Social Security numbers into context

Let’s use a simple example of someone with a full retirement benefit at age 67 of $2,000 per month ($1,400 benefit at age 62, $2,480 benefit at age 70). If the breakeven age is 80 for someone taking benefits at age 70 instead of age 62, they would receive an extra $12,960 ($1,080 per month) per year for every year they live past 80 over what the person who took it at 62 would receive. If they both lived to age 90, this is almost an extra $130,000. The person claiming at age 62, would need to have saved more than an extra $130,000 (due to taxes) in a retirement plan to have stayed even with the recipient who claimed their benefit at age 70.

As we can see from the example, life expectancy can play a major role in deciding when to take Social Security. A person in ill health or a family history of short life expectancies may want to consider taking Social Security at an earlier age than their full retirement age to maximize their benefit. For someone in good health and with longevity running in their family, claiming at full retirement age, or better yet waiting until age 70 to claim their benefit, will maximize their Social Security benefit and give them the best chance of not having their money run out in their life span. Current life expectancies give a person reaching age 65, about a one-in-five chance of living to age 90. Women tend to have a higher life expectancy than men.

Retirement readiness means successfully balancing your social security options and retirement savings with your personal retirement goals.

CoPilot – PAi’s managed 401(k) retirement savings service offers tools to help keep participants on track to meet their retirement goals that include one-on-one consultations and webinars, automatic investment with age-appropriate risk-based models and automatic alerts. Contact us online or give us a call to get your plan started: 800.236.7400.

Did you miss Part 1 of our 3-part series on Social Security and retirement planning? Click here to read Ask yourself: What role will Social Security play in my retirement years?

Kent Wright – Due Diligence and De-accumulation Analyst – jkwright@pai.com – 800-236- 7400 x 3252

Kent is a subject matter expert on 401(k), retirement accounts, investments, and financial services. Kent is also a published author.