Where Does Social Security Fit in Your Retirement Plan?

Many retirees rely on Social Security as one part of their retirement income plan, but how much of a role should it play in your overall strategy?

With benefits that can make up anywhere from 30% to 90% of the average retiree’s post-retirement income, it’s crucial to understand how Social Security fits into your full retirement plan. 

In this guide, we’ll review the role Social Security plays in the average retirement plan, the current state of Social Security, and what you can do to maximize your benefits. 

The Three Pillars of Retirement

There are three main components to most retirement plans: Social Security, pension benefits, and withdrawals from savings. Like a stool that needs at least three legs to stand up, having all three of these components is ideal, but it’s not always realistic. Pensions are becoming less and less common as employers have shifted toward other forms of deferred compensation. In fact, only about 31% of Americans will retire with pension benefits at all, and recent reports suggest that only 7% will retire with all three retirement pillars.

If you are part of the majority of Americans who won’t be able to rely on a pension, your Social Security will play an even bigger role in your retirement plan, and chances are that it won’t be enough by itself.

Will Social Security Make an Impact?

One of the most important aspects of retirement planning is quantifying how much your retirement will cost versus how much you will receive from Social Security. 

Let’s take a look at the numbers:

• Average benefit payment at age 62: $1,543 per month
• Maximum benefit at full retirement age: $3,011 per month
• Maximum benefit payment if you wait until age 70: $3,895 per month

The average cost of retirement is $50,220 annually, or $4,185 per month. When compared to the maximum benefit amounts listed above, this means that if Social Security is your only source of retirement income, you could be looking at a deficit between $290 and $2,642 per month!

It’s easy to see just how big of an impact Social Security can make on your retirement plan, which is why planning ahead is a vital part of maximizing your benefits.

Crucial Claiming Decisions

Planning ahead involves understanding two important claiming decisions that can help to optimize your total lifetime benefit:

1. When to Claim Benefits

Social Security benefits can be claimed between ages 62 and 70. However, the timing of benefits will impact the total amount received. Benefits claimed at 62 will result in a reduced monthly amount, while waiting until full retirement age will allow you to receive your full primary insurance amount, which is the full benefit that you have earned based on the amount you’ve paid into the Social Security system. If you don’t need your benefit at this age, you can delay your claim. For each year that you delay, your benefit will increase by 8%, for a maximum possible increase of 32% at age 70.

2. When to Claim Spousal Benefits

Deciding how and when to claim spousal benefits will depend on your unique financial situation and should be reviewed thoroughly in the context of your overall retirement plan. Generally, it may be wise for the lower-earning spouse to begin collecting benefits early, while the higher-earning spouse waits until age 70. This will allow the couple to make use of the lower benefit, while allowing the higher benefit to grow to its maximum amount. However, everyone’s circumstances and what is best for you will depend on your unique situation. 

The Current State of Social Security

No matter how or when you claim your benefits, understanding the current state of the Social Security program is crucial in order to properly plan for retirement. Unfortunately, there are many problems with the current system that make projecting long-term benefits more difficult. Recent estimates suggest that the program may run out of funding by 2034, at which point, if no changes are made, benefit payments may shrink to 78% of what Americans expect.

The issues with the program are systemic and range from persistently low interest rates and collectively longer retirements, to significantly more beneficiaries and not enough workers contributing to the fund. Taken as a whole, these factors indicate that the Social Security system is currently underfunded and may not be earning enough to pay its obligations. 

Social Security & Your Retirement Plan

With the potential problems in the Social Security system, it’s important to protect your retirement plan by ensuring that Social Security is not your only source of income. Sure, Social Security acts as a great pillar for retirement—but on its own, it may not be able to carry the weight of the average American’s retirement costs.

For this reason,  retirement planning encompasses more than just a solid understanding of your Social Security benefits. You need to make sure that you have a robust investment strategy with the right amount of potential return and risk so that your investments will be able to provide sufficient income to supplement your Social Security. Carefully balancing risk and reward is critical to not running out of money. You also need to plan for a tax-efficient withdrawal strategy to make sure you are not paying more in taxes than you have to.

Social Security is just one piece of the retirement puzzle, and you have to look at all components of the big picture to see exactly where it fits. The best way to do this is by partnering with a financial professional. 

We Can Help

A comprehensive retirement planning strategy requires significant planning and attention to detail. At RJL Financial Group, we work with married couples who are retired or getting ready to retire and women who are recently divorced or widowed. Our clients leave us in charge of their finances while they enjoy life. Want to learn more? Schedule a complimentary consultation by contacting us at (201) 612-6626 or info@rjlusa.net. 

About Jerry

Jerry Clark is the Founder and Principal at RJL Financial Group, an independent financial advisory firm dedicated to supporting and empowering their clients so they can enjoy life without financial worry. With more than 20 years of experience, Jerry specializes in guiding his clients through transitions, whether that be retirement, divorce, or widowhood. His tailored services and strategies help set clients up for the retirement they dream of, overcoming challenges and taking advantage of opportunities along the way. Jerry is a former golf pro who would play every day if he could! Inspired by his sports coaching background, he aims to motivate and empower pre-retirees and retirees to achieve predictable savings results, giving them the ability to feel secure about their future. Jerry is known for going the extra mile for his clients and building relationships that make his clients feel like family. 

When he’s not working (or playing golf), Jerry loves spending time with his wife, Lisa (whom he’s known for 40 years!), and their two grown daughters, Riley and Josie. You can often find him working or relaxing at his beach house in South Bethany, Delaware. To learn more about Jerry, connect with him on LinkedIn.