Although I personally lean Center-Right in my personal political worldview, I believe that Social Security is one of the most valuable government programs ever created. Although there are some questions about it's sustainability due mainly to demographic factors (thanks Baby Boomers!) it "gets the job done."
No one ever got rich off of Social Security, but it kept many hard-working retirees who lacked the means/money/willingness/ability to save and invest from living a life of destitution in their last years. As I mentioned in my introductory post, "simple is better," and, despite some complicated rules and calculations, Social Security is a very straightforward program. You (and your employer) pay money during your working years, and you get a modest stream of payments at retirement, adjusted for inflation and guaranteed for the rest of your life. That's a pretty good deal.
However, like most government programs, there is a bureaucracy, and this creates confusion. And the confusion gives rise to a number of misconceptions which put retirees at risk of leaving a lot of money on the table.
Filing too early at age 62 (currently the earliest age to file).
This is a big one, and potentially the most expensive. I get that a lot of people don't like their jobs, and I also appreciate that some people simply cannot physically work at their job due to age-related physical limitations (good luck with that jackhammer!) However, every year you postpone filing for benefits could mean a lot more money in your pocket over your remaining life.For most people who are considering retirement within the next 10 years, "full retirement age" is between 66 and 67 years old, depending on your date of birth. For every year you choose to file earlier, you lose 6% of your monthly payment. So, if your full benefit is $30,000 per year, then your partial benefit at 62 is roughly 5*6%, or 30% less. Do you want $21,000 per year for life or $30,000?
On a more positive note, your benefit increases 8% per year past 67 (up until 70). So, if you can hold out until 70 (by taking a part-time job, or using your investment portfolio to provide income), then that $30,000/year at 67 is now $37,200/year.
(Note that these calculations are very rough estimates - please check the Retirement Estimator for more exact calculations based on your specific income and payment history.)
Of course, not everyone has the ability or desire to work until age 70, even on a part-time basis, and people in poor health may want to take benefits earlier to account for a shorter expected lifespan. However, a typical retiree in average health would benefit from postponing the filing date. Remember, once you file, you can't take it back.
Not optimizing Social Security, because "I have $1 million in the bank."
A million dollars isn't what it used to be, especially for a pre-retiree in good health with an upper middle-class lifestyle. Using the somewhat outdated and misleading "4% rule" safe withdrawal rate (much more about this in future posts!), $1 million only throws off about $40,000 per year in annual spending money. That doesn't exactly buy a lot of around the world cruises and golf club memberships, once trivial expenses like housing and food are taken into account.Assuming the same $30,000/year benefit, Social Security provides 43% of this "millionaire's" $73,000 combined spending budget in retirement - before taxes. Plus, it is a guaranteed $30,000/year. The retiree has to either skillfully manage his/her investments to maintain that 4% spending rate (and hopefully withstand the inevitable market crashes - see my previous post for details). This problem is compounded if the person retires at 62 vs. 67, because, not only does s/he get a much lower social security benefit, his/her investment portfolio has to work harder to fund an extra five years of income.
Expecting too much from Social Security.
On the other end of the spectrum are the people who really haven't put much of anything into private retirement plans, either from lack of knowledge or a mistaken belief that social security can provide all of their needs in retirement. This can be a scary situation, because it's very difficult to play catch-up at a late stage of life, financially-speaking. Compound interest is a wonderful thing, but it needs a lot of time to work its magic.Take the previous example, only instead of $1 million, put just $100,000 into the retiree's investment account with the same withdrawal rate and same social security payment. That $100,000 only provides a pittance - $4,000 per year - which barely contributes to the total spending budget of $34,000, with social security providing 88% of the total retirement income. $34,000 doesn't go a very long way in most suburban and urban areas, and the retiree has very little in reserve to protect against unforeseen expenses along the way. The only option in this case is to work as long as possible, file at 70, and at least work part-time after that for a while.
The good news is that there is a lot of good information on the Social Security Administration's website, and you can also register to get your detailed projection of future social security benefits (and it's the one website where they truly need your social security number for identification!)
For the more dedicated, there is a program called Maximize my Social Security, which was developed by a leading researcher in retirement spending, Dr. Laurence Kotlikoff. It costs $40 per year, but is very effective. In fact, Dr. Kotlikoff was so effective at "maximizing social security," that the government recently changed the program rules to eliminate a loophole that he found and popularized, called "file and suspend." The link to the program is here.
Note that I do not have any financial connection to this software or Dr. Kotlikoff. I do use his financial planning software called Maxifi to develop my personal financial plan.
