It’s tough to focus on Social Security until retirement is right around the corner. However, it’s worth doing a bit of research so you don’t get swayed by scary headlines – and so you can understand how to best integrate your social security benefit into your retirement plan.
Here’s a summary of an excellent article from Barron’s debunking five of the myths surrounding Social Security.
Myth 1: Cost of living adjustments (COLAs) are back. A COLA is just an increase in your Social Security payment to keep pace with the prevailing inflation rate. We have had very little inflation over the past few years, and therefore COLAs have been virtually nil. The estimate for the next increase is 2.2%, which is still below the 30-year average increase of 2.6%, but above the Consumer Price Inflation - Wage Index (CPI-W) of 1.5%. However, we question whether the CPI-W is an accurate gauge for increasing benefits? The CPI-W reflects consumer prices wage earners are exposed to, not necessarily the excessive costs retirees are subject to – for example, the sky-high cost of many prescription medications. So, when developing your financial plan, make sure to add in a budget for cost of healthcare to cover these higher costs.
Myth 2: Retirees should start benefits as soon as possible. Actually, the longer you wait, the higher your benefit payout. What the Social Security Administration calls your “Full Retirement Age” (between 66 - 67 for those born in 1960 or later) is the age that many decide to start their benefit given this is around the time they retire. But if you can afford to wait until 70, you will receive about 132% of your FRA benefit!
However, the primary consideration is life expectancy. The payoff in waiting until 70 to start your benefit is bigger for women, because they tend to outlive men. And for married couples, it makes sense for the higher income earner to defer taking Social Security because the survivor benefit will also be higher for the person who lives the longest – again, typically women.
Myth 3: Social Security is going broke. This is likely what you worry about the most. But, the reality is that this is overstated – assuming no changes before 2034, recipients would receive only 77% of their promised benefit. However, our guess is that changes will be made, with the FRA continuing to be extended.
Myth 4: Longevity is the reason Social Security is going broke. Actually, this isn’t the biggest factor, and its effects are slowing. Rather, the bigger reason for the shortfall is that we have a significantly large number of baby boomers retiring. This is putting a strain on the system, coupled with the declining birth rate: from 1974 – 2008, there were more than 3 workers for each Social Security recipient, but by 2035, there will barely be two.
Myth 5: Loopholes have been closed. The best one, “File & Suspend,” has been closed as of April 2016. However, “Restricted Application” is still available for those born on or before January 1, 1954. Restricted Application allows the lower-earning spouse to begin collecting regular benefits at their FRA. The higher-earning spouse files only for a spousal benefit, allowing their benefit to continue to grow until he/she switches over to the now-larger retirement benefit.
The bottom line is that it literally pays to be informed. You can do your own math by using one of the many calculators available (one option is the AARP calculator), or work with your advisor.
If you are interested in reading the full Barron’s article, click here.
Be informed. Be intentional.