Business Resources, Inc.

 

Social Security Average Benefit

Is Equal to $1M Safe Savings

By John E. Anderson

Management Consultant

The good news is that the average Social Security benefit of $1,262 is equivalent to what you'd earn on a $1 million guaranteed principal investment. Do the math: $1 million at 1.5% is a monthly interest income of $1,250. Plus, the payment amount is linked to inflation so it adjusts to annual cost of living and it's among the safest investments on earth.

The bad news is $1,262 doesn't go very far these days. For too many Americans, it represents the largest part of their retirement income. Social Security is 90% of the total retirement income for 23% of married couples and 46% of unmarried persons, according to the Social Security Administration website.

Like many things in life, if you have knowledge, pay attention and are willing to change your behaviors you can improve your financial health. The sooner you begin and consistently adjust to changes, the better you and your family will be.

We're in the midst of a retirement avalanche across the country. "More than 10,000 Baby Boomers will reach the age of 65 every day for the next 19 years" reported the New York Times in January 1, 2011. We still have 16 years to go.

Interesting to note:

1) Social Security taxes apply only to the first $117,000 of 2014 wages;

2) The Social Security Trust Fund had a $69 billion net increase in 2011;

3) Benefit payments will deplete the fund in about 2033, and thereafter payments will be 75% until 2086, unless Congress acts.

Your Benefits

Benefits are determined by two things: 1) your age when you begin to collect  and 2) the highest 35 years of earnings on which you've paid the Social Security payroll tax.

If you begin collecting at age 62 and continue working, your earned income can temporarily reduce your benefit, but that amount will be available to you later. If you collect early, your  adjusted gross income may exceed legal limits and you could be required to return the funds.

If you choose to collect early, your benefit will be significantly lower than if you wait until age 66. If you delay collecting until age 67-70 your benefit will be higher each month you delay. The difference between collecting at age 62 and 70 can mean as much as twice your total benefit. Each person's amounts will vary and your optimal age can be determined and compared to your life expectancy so you can intelligently decide.

In addition to your base payment, an annual cost of living adjustment is linked to the Consumer Price Index. The COLA was 1.5% for 2014, 1.7% for 2013 and the historical average is 2.5%. The COLA figure is typically announced in November or December for the following year.

You can estimate your Social Security benefits with quick and detailed calculators at http://www.ssa.gov/planners/benefitcalculators.htm

Your Options - Augmenting Your Social Security

The original Social Security Act of 1935 was intended to supplement your company pension. In the last 5-25 years organizations have moved away from defined pension benefits to defined contribution plans such as 401(k) and IRAs. As this has occurred, more and more people are depending upon their Social Security as their main retirement instead of as a supplement.

I recommend that to the extent that you can, you build a portfolio of savings and investments which can create an income stream to match or exceed your expected Social Security. It's great that Social Security is like a million dollar annuity, but we must all work to build further secure retirement income for ourselves and our family. What else can you do to increase your retirement income? Consider what is the best age for you to begin your benefits. Delay collecting your benefits and continue earning and saving. Additional earnings may increase what Social Security benefits you receive. Segment your savings for emergency cash needs, replacement of your car or major appliances and choose some portion of your savings to be paid to you late in your life, as an annuity stream to continue until your death or have the account balance go to your heirs.

Financial experts used to be responsible for our retirement. "The financial risk of retirement has been transferred from those best able to bear it ... to those less knowledgeable and least able to bear it...." according to the Wharton Financial Institutions Center.

Difficult as it is, each of us must spend significantly less than we earn and save the difference. If a person begins to collect their benefits at age 62 it will be 25% less than at the full retirement age of 66. If a person delays until age 70, the benefit will be 32% greater than at age 66. Most break-even points are between age 78 and 81. People are living longer.

It's challenging to watch your resources and make careful choices to save more and spend less at any time. It will only become more difficult to do this later than if we begin now, particularly if you're still working and have the option to make more, spend less and save.

The life expectancy for a 65 year old is 84.2 years. For a married couple, there is a 50% chance that one of them will live past 91, according to the US Department of Health and Human Services 2011 and the Institutional Income Council.

The voting block of retired persons is large. If the wage cap of $117,000 were to be removed, Social Security would be funded in perpetuity. Social Security will be there for those of us facing retirement now or in the near future. If the cap were removed, benefits could also be guaranteed for younger contributors.

If you are 42 or older, it is very unlikely that your benefits will be reduced. If you are younger than 42, and if Congress fails to address the issue, either your benefits will be reduced or your cost will be increased.

In summary, options to be considered include:

  ▪ Saving more and doing ongoing financial planning for your future,

  ▪ Delaying your Social Security as long as possible,

  ▪ Continue working, earning and saving until age 70, regardless of when you begin benefits.

  ▪ Encourage Congress to act, possibly by removing the $117,000 wage cap.

  ▪ Go to www.socialsecurity.gov/myaccount to set up your account and review the earnings record to be sure the information is correct.

Sources and further reading list:

Gary Duell, financial advisor, Duell Wealth Preservation, Happy Valley, Oregon

Research on SocialSecurity.gov

Richness of Life Social Security class, Clackamas Community College, Milwaukee, OR

Strategies To Boost Your Social Security by Knight Kiplinger, Kiplinger.com

Visits to and phone conversations with Social Security Administration