As a plan sponsor and business owner you help participants in retirement plans set and meet retirement goals. You want every participant to achieve a level of retirement readiness allowing each to meet their goal of a happy and prosperous retirement. 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.
Retirement readiness generally involves three parts:
1. A well-funded retirement plan
2. Personal savings
3. Social Security
When talking to participants about their retirement readiness or talking to many of your friends, you will hear the same comments over and over from people who are struggling to meet their retirement goals or have never set them. Conversations like, “I don’t need to worry about saving for retirement as I plan to work until I die” or “… besides, I will always have Social Security” come up a lot, often spoken with little thought. This mentality reinforces the reasons participants need to start thinking about the role Social Security plays in retirement planning early in their careers.
Your retirement age impacts your Social Security
If you’re like most people you’ll retire before age 65. While for some it may be a matter of choice, for many, it’s not. For the group of people for whom retirement was not their choice, there are several reasons, (1) involuntary layoffs/job loss or (2) illness of either themselves or another family member. How widespread is this? An average of around 60% of people eligible for Social Security take their benefit before age 65, with around 45% taking their benefit at age 62. This is happening even though the current retirement age for Social Security is age 66 moving incrementally to age 67 over the next couple of years.
Many people will find they are very likely to live much longer than they are able to work. Also, by taking their Social Security benefits before their full retirement age, there will be limitations on the benefit amount as well. These limits will make it hard to depend solely on Social Security for retirement. Social Security as designed was never intended to be a full income substitute for retirement. It was designed to replace about 55% of the income for a low wage worker, 40% for an average wage worker, and only about 35% for a high wage worker. The differences from the designed amount and the income actually needed in retirement will have to be made up with income from a retirement plan or personal savings.
The best age for retirement is …
Well, that depends. To understand Social Security, the first thing you need to know is your full retirement age. The full retirement age (FRA) is gradually moving from age 66 to age 67 for people born in 1960 or later (for purposes here, we will assume 67 is the full retirement age). Once you attain your full retirement age, you are eligible for your primary insurance amount (PIA). Your PIA is the amount of your benefit at full retirement.
This amount is important because depending on when you take your benefit (before full retirement age, at full retirement age or afterwards up to age 70), the amount you receive will be either discounted or increased from the primary insurance amount. Taking benefits at age 62 with an age 67 full retirement age will result in a 30% decrease from the primary insurance amount. If you delay taking your benefit past your full retirement age, you will see an increase in the benefit amount of 8% per year up to age 70. This is a 24% increase over the primary insurance amount at age 67.
Putting actual dollars to the numbers
As an example, a person with a primary insurance amount of $2,000 per month at age 67, taking the benefit at age 62, would see a 30% decrease in the amount they receive to $1,400 per month ($600 per month less). If the recipient waits to take their $2,000 benefit until age 70, they would receive $2,480 per month ($480 per month more). Remember, these amounts are paid for life so the claimant who waited till age 70 to start receiving their benefit would get $1,080 more each month for their lifetime than the recipient who claims at age 62. Since Social Security is indexed to inflation (COLA), over time this discrepancy in benefits will only widen.
Keep in mind
The average benefit paid to a Social Security recipient in 2017 is about $1,360 per month (about $16,320 per year). The average recipient receiving this amount with little or nothing in a retirement plan or personal savings is going to struggle with their retirement. Even for the highest income worker, the maximum amount a recipient can receive at their full retirement age for 2017 is about $2,687 per month (about $32,244 per year).
There are 401(k) plans out there like PAi’s CoPilot that can be part of your retirement planning and will 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. Your investments will be monitored for performance and you'll receive real-time messaging whenever an event occurs that will impact the health of your retirement. And you'll always have a clear picture of how much retirement you're actually buying, because CoPilot translates your savings into what matters most - how many years you can afford to be retired. Let’s start with a conversation. Contact us online or give us a call to get your 401(k) plan started: 800.236.7400.
Be sure to check back for Parts II and III in our 3-part series on Social Security and Planning for Your Retirement. Next up: Part II – Why a retirement plan helps and Part III – Making a retirement plan and Social Security work together.
www.fool.com (March 2015). Here’s when most people are retiring. Should you do the same? Retrieved fromhttps://www.fool.com/retirement/general/2015/03/22/heres-when-most-people-are-retiring-should-you-do.aspx
www.fool.com (February 2017). SSA-CCR survey supporting documentation from the Consumer Financial Protection Bureau.
Kurt Czarnowski (July 11, 2017). Webinar: Get Expert Insight on new Social Security Laws.
www.ssa.gov Social Security Administration. (2017)
Kent Wright – Due Diligence and De-accumulation Analyst – firstname.lastname@example.org – 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 fiction author.