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Navigating Retirement: How Social Security Fits Into Your Financial Future

2023-6_Where Does Social Security Fit in Your Retirement Plan

By Henry Zupko, MBA, CFP® 

As retirement approaches, you’re likely considering the Social Security piece of the puzzle. Amidst the wealth of information around retirement timelines, benefit utilization, and withdrawal strategies, it can be a lot to digest and comprehend. While you’re likely aware that you’ve contributed to the Social Security system and will eventually be eligible for benefits, understanding the nuances of your withdrawal strategy and the timing of your retirement may not be so clear. 

With post-retirement income ranging from 30% to a whopping 90% or more, the importance of understanding how Social Security fits into your retirement plan cannot be overstated. Today let’s delve into the intricate role that Social Security plays in an average retirement plan, shed light on the current state of Social Security, and equip you with some valuable strategies to optimize and maximize your benefits. 

There are three main components to most retirement plans: Social Security, tax-deferred retirement plans such as 401(k)s and IRAs, and withdrawals from savings and investments. 

Pensions have become less and less common as employers shift toward other forms of deferred compensation, and only about 31% of Americans will retire with pension benefits at all

If you are part of the majority of Americans who won’t be able to rely on a pension, without proper planning, 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 today’s numbers

  • Maximum benefit payment at age 62: $2,364 per month
  • Maximum benefit at full retirement age: $3,345 per month
  • Maximum benefit payment if you wait until age 70: $4,194 per month

The average cost of retirement for retirees between the ages of 65-74 is $53,916 annually, or $4,495 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 $301 and $2,131 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:

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 you delay, your benefit will increase by 8% until it caps out at age 70.

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 income plan. In general, the lower-earning spouse may choose to begin collecting benefits early or at full retirement age, while the higher-earning spouse may wait 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.

The Current State of Social Security

No matter how or when you claim your benefits, we believe 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 will run out of funding by 2035, at which point, if no changes are made, benefit payments may shrink to 80% of what Americans expect.

The issues with the program 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 not earning enough to pay off its obligations

A Retirement Plan That Fits Your Needs

As we look ahead to the future, it becomes increasingly crucial to safeguard your retirement plan from potential challenges. With projections showing a significant decrease in Social Security benefits in just over a decade, it’s vital to avoid relying solely on this program as your primary source of income during retirement. While Social Security serves as a valuable pillar in retirement planning, it is often insufficient to bear the full weight of the average American’s retirement expenses.

Diversifying your income sources and exploring additional avenues of financial support is key to building a resilient retirement plan. By supplementing Social Security with other income streams, such as personal savings, investments, and retirement accounts, you can create a more stable financial foundation for your retirement years.

In the complex big picture of retirement planning, Social Security is just one important piece of the puzzle. At Tranquility Path Investment Advisors, LLC, we specialize in helping individuals like you build a robust retirement plan that incorporates all the necessary components. Our team works closely with you to understand your unique goals, assess your financial situation, and develop a personalized strategy that maximizes the benefits of Social Security and aligns with your overall retirement objectives.

If you’re approaching retirement and have questions about how Social Security fits into your financial plan, we’re here to help. Schedule an introductory meeting online or reach out to us at (908) 759-6322 to schedule a consultation and take the first step toward realizing your ideal retirement future.

About Henry

Henry Zupko is founder and president at Tranquility Path Investment Advisors, LLC, an independent Registered Investment Advisor firm dedicated to putting their clients first, always. With over 30 years of experience, Henry sets the direction of the firm, manages, and in many cases personally interacts with clients to help develop financial strategies that set them on a tranquil retirement path. He is passionate about being a trusted partner to his clients, developing long-lasting relationships so he can guide them through life’s milestones, twists, and turns. In all he does, Henry strives to make a positive impact on others and help change their lives for the better. 

Henry is a CERTIFIED FINANCIAL PLANNER™ professional and holds an MBA from the University of Massachusetts and a bachelor’s degree in electrical engineering from the New Jersey Institute of Technology. Henry is a proud Eagle Scout who loves traveling the world and spoiling his grandchildren. To learn more about Henry, connect with him on LinkedIn.

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