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Social Security: How to plan around uncertainty

Key Points

  • Americans are not confident in Social Security solvency, according to new research
  • Benefit amounts can vary greatly based on the age that you begin collecting
  • Legislative standoff could make other sources of retirement income more crucial

Social Security has been serving as a safety net for over 80 years. Will it still be around for future generations? More than a third of today’s workers are “not too confident” that the Social Security system will continue to provide benefits of equal value to the retiree benefits today, according to the 2017 EBRI Retirement Confidence Survey.

So, what can you do in this climate of uncertainty to stay on track with your retirement planning? Here are several key factors to consider.

The political reality

Potential Social Security changes

Some pessimism may be warranted: According to the Social Security Administration, benefits are expected to be payable in full until 2037, after which revenues are predicted to pay only 76% of scheduled benefits. Yet it’s a problem that could be fixed.

“There’s a whole host of things that could be done to extend the life span of the trust beyond that,” says David Joy, Chief Market Strategist at Ameriprise Financial.

One of the solutions being debated is eliminating the income cap that shields earnings above $127,200 from Social Security tax. Other proposals include gradually increasing full retirement age (FRA) to 69 or curbing benefits for future recipients. “The willingness to tackle it in such a way that you wouldn’t be characterized by your political opponents as somehow favoring one class over another — that’s the challenge,” Joy says.

The age factor

Future of Social Security benefits

To help offset the financial costs of increasing life expectancies among Americans, in 1983 Congress raised the FRA at which you can receive Social Security. FRA jumped from age 65 to 66 for those born between 1943-1954. After that, the adjustment becomes more gradual, increasing two months each year for those born 1955-1959. Those born in 1960 or later must wait until age 67 to receive full benefits.

If you’ve paid into the system for at least 10 years, you can start receiving benefits as early as the first full month after reaching age 62. But doing so will permanently decrease the amount received each month by 20–30% depending on your FRA. Conversely, if you delay collecting past your FRA, your monthly payout will continue to increase until you turn 70 — the age at which maximum benefit amount is reached.

To wait or not to wait

Though collecting later increases your overall benefit, with the future of Social Security up in the air, some may wonder whether it’s worth waiting if payouts are predicted to be reduced by 24% in 20 years. Would it be better to start collecting and lock in your benefit while you’re relatively young — even if it means reduced payments? Claiming earlier could also enable you to delay drawing income from your portfolio, allowing it to continue to grow.

Social Security changes and income

You may also decide to collect before your FRA if you’re planning to “unretire” and pursue what’s commonly referred to as an encore career. That would allow you to supplement your income with Social Security benefits while leaving your retirement portfolio untouched until you fully retire. Just be sure to run the numbers first; while Social Security benefits aren’t taxed on their own, you may pay taxes on your earnings if your “combined” income (including adjusted gross income, tax-exempt interest income and half your Social Security benefits) exceeds $25,000 ($32,000 for couples).

Your advisor can help

The age at which you collect Social Security is a highly personal decision that should be carefully weighed by doing a cost-benefit analysis as well as looking at your whole financial picture. Legislative gridlock aside, benefits only replace about 40% of the average earner’s pre-retirement income, according to the Social Security benefit structure. By working with you to develop an independent income stream in retirement, your financial advisor can help prevent potential Social Security uncertainty from negatively impacting your future lifestyle.