One of the most important elements of retirement planning is analyzing a host of unknown variables including our predicted life expectancy, our future expenses, and the income we will need to cover those expenses without sacrificing our quality of life. More often than not, retirement income is generated from multiple different sources such as pension plans, IRAs, and investment income, to name a few. It’s likely you’ve also imagined social security benefits funding a portion of your retirement. After all, we spend our entire working lives paying into the program with the expectation of receiving future benefits.
However, over the past decade, as more and more baby boomers have left the workforce and started receiving their benefits, the Social Security Administration has calculated that the current tax revenues, and the liquidation of the bonds held in the Social Security trust, will only be able to maintain Social Security payments until the year 2034. Such an announcement has alarmed many pre-retirees who foresaw relying on those payments to bridge the gap between their income and expenses.
But, not all hope is lost. It’s a common misconception that Social Security benefits will cease entirely after the bonds held in the Social Security trust are depleted. Luckily, this isn’t the case. Since the majority of benefits are funded by payroll tax revenue, some benefits will still remain. The idea is that FICA taxes paid by current workers will directly fund benefit payments for retirees.
The Social Security Trustees anticipate the program will be capable of paying approximately 79% of benefits in 2034 with a gradual shift to 71% of benefits through 2089. So while payments will not dissipate entirely, they will take a 21% cut in 2034, and a 29% cut over time if nothing is done over the next fifteen years to ameliorate these projected shortfalls.
Ultimately, though, there are a number of mild strategies that could increase the longevity of the program such as boosting the Full Retirement Age or reducing the annual cost-of-living (COLA) adjustment by 1% each year. So despite the popular media hype, social security isn’t quite on its way out and should not be discounted as a possible source of retirement income.
Naturally, however, these projections have incited quite a bit of doubt in pre-retirees, causing them to question whether they should claim their benefits while they can or delay in an effort to guard against bad market returns and high inflation. But, the answer is neither simple nor universal.
First and foremost, the decision to accept or delay Social Security benefits should not be made in isolation, but in the context of your overall financial framework. In order to time your social security benefits in a way that maximizes long-term income, you’ll need to analyze the projected performance of the other assets in your portfolio. Fundamentally, a delay is only fiscally beneficial if it generates returns in excess of those you would receive from other investments of comparable risk over the same period of time. The matter is further complicated for couples coordinating claims to maximize survivor and spousal benefits.
Since it’s unlikely Social Security benefits will be completely depleted in this lifetime, it’s safe to include them as a viable piece of your retirement planning puzzle. Consult with your financial advisor about putting together a timeline for claiming benefits that will augment your retirement income and complement your long-term financial plans.