The New Year is always a good time to reevaluate the big picture of your retirement finances. And while Social Security remains a great political punching bag, the reality is that if you are over 45, and an investor, it means that Social Security, subconscious or not, plays a big part in your investment strategy. While it’s subject to political risk, financially it’s the safest part of your financial plan. The government will continue to keep happy the most dedicated block of voters by paying Social Security benefits, promptly.
The most common question investors ask when thinking about Social Security is: How much money will I get? It’s a good question because when doing calculations for financial planning, the first question financial software calculates is: How much money will you get from Social Security. It then backfills your investment portfolio to fill the income gap.
The answer to how much you get depends on a two different factors. The first is how much money you made over your highest 35 earning years. These years are adjusted for inflation, then averaged to come up with a monthly benefit at full retirement age. You can get an estimate of your full benefits by going to the Social Security Administration site and looking at your statement.
One of the ways of knowing if you are dealing with a high-quality financial planner is whether or not they ask to see your Social Security statement or just rely on software to make a largely inaccurate forecast of what your benefit will be. The benefit will vary but the maximum benefit is $3538 for those with enough paid-in earnings to qualify and who also wait until the maximum retirement age of 70 years old. For comparison purposes, it would take a portfolio of $1,900,000 to generate the maximum benefit invested in 15 year Treasuries today. The average monthly benefit in 2017 is a little more than half that at $1400 per month. It would still require a million-dollar portfolio to generate an income as risk-free as Social Security pays as an average benefit.
Once it is determined what your full-retirement age monthly benefit will be, people then determine at what age to claim Social Security. The answer can depend on a lot of factors: Are you married or single? If married, were you the high earner? Do you need the money now? Are you entitled to an ex-spouse’s benefit? As a note, claiming benefits from an ex-spouse will not reduce their benefit, nor will they ever know. So, yes, apply.
Generally speaking, and there are a lot of variables that determine when it’s best to claim Social Security, your genes determine when you should apply for benefits. Because genes are the best way of knowing how long you will live.
Full retirement age used to be 65, but is now 66 years and two months. Full retirement age will gradually rise to 67 for those born in 1960 and after. Social Security can be claimed at 62 years of age, but the payout is 70 percent of the full benefit, rising to 86.7 percent if you wait until 65 years of age. These changes in retirement age reflect longer lives, more working years and a bigger strain put on Social Security as it pays out claims for longer lived retirees.
While most people are only interested in the maximum monthly number for claiming Social Security, it is the lifetime payout that should likely determine when you take benefits. If your mother and father lived a long time, you might live long too, so the thinking goes.
The numbers of people who are living past 100 is exploding, and there are very real concerns that people will outlive their retirement savings or that retirement savings will be gobbled up by disability, hospitalization, or long-term care. All the better that people who might live a long time, wait a long time to take Social Security.
Of course, long-lived or not, you may need the money now. The decision is a personal one, where really there are no right or wrong answers, just personal ones.
For questions about Social Security or other personal finance matters, email: PF@wstreet.com
John Ransom writes for the Conservative Institute, is the former finance editor for Townhall, host of the Social Security Show and Ransom Notes Radio.