Social security can make or ruin your pension, especially if your personal savings are not exactly where you want them to be. In fact, a good deal of retirees depend on their social security benefits just to make ends meet.
Almost half (48%) of married couples and more than two-thirds (69%) of unmarried supporters depend on their monthly checks for at least 50% of their income, according to the Social Security Administration. It's more shocking that 21% of married couples and 44% of unmarried pensioners rely on social security for at least 90% of their retirement income.
Now, the average social security benefit is about $ 1,300 per month. Those who have no other source of income may need every last dollar they can get from Social Security. So it should not come as a surprise that many Americans share a similar concern about the future of the Social Security program.
About 44% of Americans are worried that there will be a reduction in benefits in the future, or that the program will be completely eliminated, according to a study by the Transamerica Center for Retirement Studies. While social security as a whole will not go away anytime soon (as long as workers continue to pay their taxes to fund the system), there is a real possibility that monthly checks may not be as big as you want. [1
Babyboomers pull out with mass, which puts pressure on social security, as more money is paid in benefits than what comes from younger workers' taxes. As a result, the National Board of Health estimates that the program will have to cut the benefits by 20% by 2035 (assuming congress does not come up with a solution before then).
So what does that mean for retirees? That means you can be in for a rude awakening If you depend on your benefits to pay your bills, if you are already stretching your controls as far as possible, a 20% reduction may damage your retirement plans.
While Congress can again make a solution by 2035, It may not be the wisest idea to leave your retirement in the hands of the government. In that case, you have two options: Increase your checks or save more on your own, so you're not so dependent on social security.
Capturing Your Monthly Social Security
How much you receive each month will depend largely on when you claim your benefits. If you want to receive 100% of the benefits you are theoretically entitled to, wait until you reach full retirement age (FRA), which is between 66 and 67 years for most, depending on the year you were born.
The most popular age to claim benefits is 62 (which is also the earliest you can claim), but by claiming that early you will face a reduction in benefits by up to 30% – for life. If you wait for the FRA, you claim (to 70 years) you will receive bonus money each month on top of the full amount to settle for the time you did not receive any benefits.
In theory, you should receive the same amount in your life-long benefits no matter what age you claim you receive either smaller checks or fewer major checks. Mathematics does not always work perfectly, though, and if you know you want to rely on social security for a decent portion of your earnings, it might make sense to endure the bigger controls.
For example, say that FRA is 67 and if you claim that age, you will receive $ 1300 per month. If you claim 62, your benefits will be reduced by 30%, giving you $ 910 per month. Then, if your benefits are reduced by an additional 20% due to the social security deficit, you're left with only $ 728 a month.
On the other hand, say you expected to claim up to 70 years. You would receive an additional 24% on top of your full benefit, so you will see monthly checks of around $ 1,612. And if you're facing 20% cut, you're still left with about $ 1,290. In other words, while reductions in benefits may still be part of your income, the impact will not hurt you so much if you receive deeper checks to begin with.
An added benefit of claiming later rather than the past is that it gives you more time to spend money on your pension fund – it's a good idea to save money.
Retirement in your own hands
Social security is designed to cushion your pension savings, not your only source of income. Even if you can't save a lot on your own, you can build at least one small nest egg at the time you retire, so that the load is so light that you don't scratch each month.
It's also easier than you might think to save for the future, but the key is to save early and often so your money has more time to grow. Thanks to compound interest, you see a snowball effect with your savings – the longer your money stays in your retirement account, the more it grows. And if you start early enough, you don't have to contribute much every month to see significant gains over time.
For example, say you are 40 years old and want to retire in 70 years. You haven't saved anything yet, but you're starting to put $ 100 a month on your retirement account, and earn a 7% annual return. At this rate you will have about $ 113,000 stashed away by 70 years. (If your employer also offers the equivalent of 401 (k) contributions, you could potentially double that number without any extra effort on your part!)
For its part, $ 113,000 probably won't go far in retirement. But combined with social security schemes, it can give you a bit more economical wiggle room. If we use the 4% rule here (which states that you can withdraw 4% of your first year's retirement savings, then adjust these withdrawals each year for inflation), you will be able to deduct $ 4,500 the first year – or $ 375 per month.
Again, that money alone will not be enough to live on. But in addition to your social security benefits, it can make it a little easier to pay your bills and still have a little left to enjoy.
When planning to retire, it's always a good idea to avoid putting all your eggs in a basket. Whatever Social Security looks like when you are ready to retire, you will find it easier to know that your retirement plans are as safe as possible, no matter what your life is.