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Will Social Security be there when you need it?

According to CNBC in an article titled, Will Social Security run out of money? Here’s what could happen to your benefits if Congress doesn’t act, “the recent 2022 Social Security Trustees report finds that in 2034, retirees will start receiving a reduced benefit if Congress doesn’t fix funding issues for the social program. In other words, Social Security will exist after 2034, but retirees will only receive 77% of their full benefit starting then.” This is alarming for many Americans that have paid into social security for years and have planned for this money as part of their retirement plan.

Social Security’s role in your retirement

We encourage everyone reading this article to go to the Social Security website and establish your account and see what your benefits are anticipated to be. The Social Security Administration used to mail out statements, but they don’t do that anymore so you have to establish an account online. When you do this, you will notice a disclaimer within your Social Security statement which states, “Social Security taxes you pay go into the Social Security trust fund that is used to pay benefits to current beneficiaries.” This means that when it comes to receiving Social Security, you are relying on the next generation. The statement continues to say, “The Social Security board of trustees estimates that based on current law and underlying current trust funds we will be able to pay benefits in full and on time until 2034.” That’s in 11 years! So, what happens in 2034? The disclosure goes on to say, “In 2034 Social Security would still be able to pay about $780 for every thousand dollars in benefits scheduled.” To learn more, check out the social security website at ssa.gov/thereforme.

So, it seems that under the current law, if we don’t change the way we are doing Social Security or reform it in some way, retirees could receive about 22% less than expected. As America’s population is aging, we have a larger percentage of people retiring now than we ever have which means more Americans are relying on Social Security. Something will have to change to ensure that full benefits will be available for you when you retire. 

Making social security a part of your retirement plan

Due to the long-term uncertainty of Social Security and the fact that the average Social Security payment across the nation is $1500 (which is not necessarily enough to live on in the USA), Social Security can only be part of your retirement plan. $1500 a month is only $18,000 annually and this is not typically the amount of money you most likely planned for to have your dream retirement. For higher income earners who make an average of $150,000 per year, your Social Security benefits might be closer to $36,000 per year, but this will likely still not enable the lifestyle you dreamed of in your retirement years – especially if you enjoyed the lifestyle that came with the $150,000 level of income.

How do they determine how much you will collect from Social Security? When can you begin taking it?

The Social Security benefit payment that you will receive in retirement from the SSA is based on an indexed average of the income you earned during the highest paying 35 years of work – (This is called Average Indexed Monthly Earnings, or AIME) They use a calculation by taking your highest 35 years of salary and they determine a factor that you would be eligible to receive if you take it at your full retirement age which is currently 67. You can take it as early as 62, but then you’ll have a permanent reduction in your benefits. Another option is to wait until you are 70 and receive a higher benefit.

To begin receiving your Social Security you must meet specific qualifications. You must work 40 quarters. This means you need to work 10 years before you should expect to draw anything out of Social Security. If you don’t work and don’t pay into Social Security for 40 quarters, you, unfortunately, won’t qualify for Social Security retirement benefits.

Is it a bad idea to take Social Security early at 62?

If you claim Social Security at age 62, rather than wait until your full retirement age, you can expect a 30% reduction in monthly benefits. This could be a huge loss for you especially if you do not have a large IRA, 401k, or other income streams. You will need to factor in this loss and determine if it is worth it. For every year you delay claiming Social Security past your full retirement age (67) up to age 70, you get an 8% increase in your benefit. This might be a great conversation to have with your advisor so they can take all of your retirement planning and goals into account.

Will Social Security be enough to live on?

The simple answer for most people is no. Social Security was intended to be an adjunct. It’s a safety net and another way of aiding in your retirement plan. 

Some ways to plan for retirement:

  1. Another way to plan for retirement is to make sure to max out your 401(k), your 403b, or any type of employer-sponsored plan.
  2. Contribute to a traditional IRA and/or a Roth IRA.
  3. One way of creating an income stream is to have a rental property. Not all of you might want to be a landlord but there are a lot of ways to invest in real estate that don’t require you to be the one fixing the water heater. Consider all your options when it comes to real estate if you want to collect passive income in retirement.

In planning for your retirement, you want to make sure you have a multi-prong approach. This is why it is important to save for retirement during your working years, develop a plan, and find other sources of income to use in retirement. 

Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment.

The foregoing is not a recommendation to buy or sell any individual security or any combination of securities. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.