Know the facts before you make decisions
Social Security is an important retirement income source for many people.
It was never intended to be the only source. For the average retiree, it represents about 40 percent of their income. For higher income retirees, it may only be 20 percent, which is still significant. It is one of the few retirement assets that has a cost-of-living adjustment. This is very important since most people underestimate the effects of inflation and taxes on retirement income.
A dilemma that many people face is balancing when to start Social Security and when to begin withdrawing from IRAs when planning retirement income. Which do you do first? It seems counterintuitive to stat withdrawing money when Social Security is available. A closer look may show that this is not always the best option. Many people start Social Security at age 62, which is the minimum. They may do a quick and dirty break-even analysis that indicates they have to live to about age 71 to break even. Do you know many people older than this age?
We have said before that they are not including the effect of cost-of-living increase sin this calculation.
They are also giving up all advanced planning options that could amount to many thousands of dollars over their lifetimes. I have seen this range from $10,000 to over $150,000. Some more advanced analysis shows that we should also consider taxes and invested asset growth.
It is important to consider such things as taxes on Social Security income (up to 85 percent), required minimum distribution from qualified accounts and tax rate on money withdrawal income to produce desired net income. Although these things seem complicated, a professional can help you sort them out. The study determined that the break-even point was lowered when taxes and investment returns were taken into consideration.
Many people underestimate the impact of inflation in retirement. If inflation is 3 percent a year, you will need 34 percent more income in 10 years and 80 percent more in 20 years just to maintain your purchasing power. Sometimes when people retire, they want to make expensive home improvements or buy lavish things. This might work in the short-term, but care must be exercised or many difficulties could lie ahead. Sometimes we must control our emotions for our own wellbeing. I recently heard of a woman who was divorced and was waiting to claim her own Social Security benefits at age 70. She did not realize that she could claim divorced spouse benefits during this time and not affect her own benefit. This discovery led to her receiving about $100,000 she did not know was available. To claim divorce spouse benefit, you must have been married 10 years and not have remarried. This is why even people past the traditional claiming age should talk to a professional about all options.
People receiving disability Social Security could become eligible for spousal or survivor benefits at some point. This may increase their check. Sometimes you can receive a lump sum check for up to 24 months of previous benefits that you did not already receive.
The Huffington Post has reported that the Social Security Administration is working on a new plan called Vision 2025. If it is implemented, it would close most of the 1,200 Social Security field offices and not replace nearly 30,000 Social Security employees. All interaction would be through call centers and a website. These resources are often stretched at this time and would have to be greatly expanded to handle the additional load.
Treat Social Security like the important asset that it is. Although the system will need some big adjustments, it is not going bankrupt. Know the facts before you make a decision. What you decide in your 60s can have a major impact of your family for decades to come.
Gary Boatman is a certified financial planner and local businessman who is president of the Monessen Chamber of Commerce.