How to make a retirement plan and Social Security work together

Life expectancy can play a major role in when you should 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.

Let’s take a look at the chart below and work through someone taking their Social Security benefits at age 62, compared with someone waiting until 70. We’ll assume the two recipients have identical retirement account balances of $250,000 and each have yearly expenses of $30,000. For purposes of the illustration, we will not take into account the impact of investment gains/losses, inflation, taxes, or the Social Security COLA.

There are many ways to claim social security but for this example we will try and keep it simple, as the underlying principals generally remain the same regardless of the claiming strategy used.

 Let’s look at the table above. At age 62 both individuals retire and have the same retirement plan balance. Our claimant who took their benefit at age 62, receives $16,800 per year in Social Security and has to make up the $13,200 difference needed to cover their $30,000 in expenses out of their retirement account. Our claimant, who waits to age 70 to take their benefit, will have to withdraw $30,000 from their retirement plan every year to cover their expenses until age 70 when they start receiving Social Security. At age 70, our age 62 claimant, will still have $127,600 in their retirement plan while our age 70 claimant, who is just starting to take their Social Security benefit of $2,480 per month ($29,760 per year) has drawn their retirement account down to just $10,000.  On the surface it looks like the recipient who took the benefit at age 62 is better off. But here is where life expectancy becomes important. Our age 70 claimant, receives $29,760 per year which basically covers their yearly expenses, while our age 62 claimant is still short by $13,200 every year. By age 80, our age 62 claimant, has exhausted their retirement plan and will have to take a drastic lifestyle change while our age 70 claimant is still doing fine barely touching the remaining balance in their retirement account. Even at age 90, our age 70 claimant will still have not run out of money.  As you can see in the illustration, when to take Social Security is a bet on life expectancy. The individual who took their benefit at 62 would be better off than the second individual as long as they died before age 80. Our age 70 claimant comes out ahead with their strategy by every year they live past 80. In this example, if both individuals lived to age 90, our age 70 claimant would receive $129,600 more than our age 62 claimant.   Retirement planning and its importance   The illustration above shows the importance of saving for retirement early. Having a goal and following through is the only way to achieve retirement readiness. Once that goal has been achieved, it is just as important to utilize the retirement plan to help maximize retirement income by pairing it with how Social Security is claimed. Picking the right claiming strategy can put up to an extra hundred or more thousand dollars into a retiree’s pocket helping insure against longevity risk in retirement.  Social Security was not designed as an income replacement source but to serve as an income supplement instead. Pairing it with a retirement plan that has been funded over a long period of time is the key for a plan participant to achieve their retirement readiness. This is why setting a retirement goal and following through on it can be a successful strategy when paired with Social Security. See if your retirement goals are in line with your social security benefits:  Calculate my retirement .  Everyone’s retirement needs will be different. There are 401(k) plans out there like PAi’s CoPilot that make it easier for you to understand and work toward your retirement goals. With CoPilot, you’ll be matched with investments that fit your needs. Simply put, personalized advice and service can result in making more informed investment decisions.   Contact us online   or give us a call to get your CoPilot plan started: 800.236.7400.  Did you miss Part 1 or Part 2 of our Social Security and Planning for Retirement series? Click here to read Part 1,   Ask yourself: What role will Social Security play in my retirement years?   Or Part 2,   Saving for retirement: Putting Social Security numbers into context .

Let’s look at the table above. At age 62 both individuals retire and have the same retirement plan balance. Our claimant who took their benefit at age 62, receives $16,800 per year in Social Security and has to make up the $13,200 difference needed to cover their $30,000 in expenses out of their retirement account. Our claimant, who waits to age 70 to take their benefit, will have to withdraw $30,000 from their retirement plan every year to cover their expenses until age 70 when they start receiving Social Security. At age 70, our age 62 claimant, will still have $127,600 in their retirement plan while our age 70 claimant, who is just starting to take their Social Security benefit of $2,480 per month ($29,760 per year) has drawn their retirement account down to just $10,000.

On the surface it looks like the recipient who took the benefit at age 62 is better off. But here is where life expectancy becomes important. Our age 70 claimant, receives $29,760 per year which basically covers their yearly expenses, while our age 62 claimant is still short by $13,200 every year. By age 80, our age 62 claimant, has exhausted their retirement plan and will have to take a drastic lifestyle change while our age 70 claimant is still doing fine barely touching the remaining balance in their retirement account. Even at age 90, our age 70 claimant will still have not run out of money.

As you can see in the illustration, when to take Social Security is a bet on life expectancy. The individual who took their benefit at 62 would be better off than the second individual as long as they died before age 80. Our age 70 claimant comes out ahead with their strategy by every year they live past 80. In this example, if both individuals lived to age 90, our age 70 claimant would receive $129,600 more than our age 62 claimant.

Retirement planning and its importance

The illustration above shows the importance of saving for retirement early. Having a goal and following through is the only way to achieve retirement readiness. Once that goal has been achieved, it is just as important to utilize the retirement plan to help maximize retirement income by pairing it with how Social Security is claimed. Picking the right claiming strategy can put up to an extra hundred or more thousand dollars into a retiree’s pocket helping insure against longevity risk in retirement.

Social Security was not designed as an income replacement source but to serve as an income supplement instead. Pairing it with a retirement plan that has been funded over a long period of time is the key for a plan participant to achieve their retirement readiness. This is why setting a retirement goal and following through on it can be a successful strategy when paired with Social Security. See if your retirement goals are in line with your social security benefits: Calculate my retirement.

Everyone’s retirement needs will be different. There are 401(k) plans out there like PAi’s CoPilot that make it easier for you to understand and work toward your retirement goals. With CoPilot, you’ll be matched with investments that fit your needs. Simply put, personalized advice and service can result in making more informed investment decisions. Contact us online or give us a call to get your CoPilot plan started: 800.236.7400.

Did you miss Part 1 or Part 2 of our Social Security and Planning for Retirement series? Click here to read Part 1, Ask yourself: What role will Social Security play in my retirement years? Or Part 2, Saving for retirement: Putting Social Security numbers into context.

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.