The Social Security Dilemma
For years the media and financial professionals have been warning us about potential funding issues with the Social Security system. While there is still time for politicians to fix future issues, one problem that has become very evident in 2021 is the lack of knowledge most Americans have on how Social Security works. The pandemic has cause those near retirement to make changes to when they will start claiming benefits. Two surveys (Nationwide Retirement Institute and MassMutual) have revealed that 60% of adults now worry that Social Security will not provide enough money during their lifetime. One-third of the respondents could not pass a basic quiz about Social Security and only 3% made an A+ by getting all 12 true-false questions correct. 70% state that the pandemic has caused them to decide to retire later than originally planned.
So, are you doomed to work forever? Not necessarily. But if you want to enjoy your golden years, you need to make some wise financial plans for your retirement. Sometimes even simple concepts get lost in the fast paced, distracting world of today's living. Things like "spend less than you earn", "save a fixed percentage of your income" or "save your raise or bonus" fall victim to keeping up with the Jones' and lifestyle creep.
Twenty percent of Americans over the age of 65 rely on Social Security for 90% of their income. This problem is compounded when you choose to take Social Security early at age 62, which will cause a lower monthly payment for the rest of their life. If you claim Social Security at age 62, rather than wait until your full retirement age, you can expect up to a 30% reduction in monthly benefits. For every year you delay claiming Social Security past your full retirement age, up to age 70, you could get an 8% increase in your benefit.1 So, if you can afford it, waiting could be the better option. Studies show that current retirees that have claimed at the earliest age 62 will lose $3.4 trillion in potential income, which is an average of $95,000 per household.
Another important aspect to remember, is that even while you are eligible for reduced Social Security benefits at 62, you won't be eligible for Medicare until age 65, so you will probably have to pay for private health insurance in the meantime. That can eat up a large chunk of your Social Security payments.
Ideally you should begin your retirement planning in your 20s, but if you are over 50 and haven't been disciplined, there are still steps you can take to make sure you are prepared when you are ready to retire.
When thinking of retiring, the topic of relocating to a place with a low cost of living often comes up, but most people do not think to ask if the state they are in taxes Social Security benefits. Only 37 of the 50 states do not tax Social Security Benefits on their state tax returns. When you factor in longevity, health care, and the cost of your expected lifestyle in retirement, your decision on when to claim Social Security and where to live may become clearer. Meet with your Private CFO® today so you can breathe easier® in retirement!