Can Social Security Benefits Help with Longevity Risk?Submitted by Reby Advisors | Certified Financial Planners | Danbury, CT on March 5th, 2019
From George Koeltl, CFP, March 5, 2019
How long will you live?
It’s not a question anyone can answer with any certainty, and that creates a significant risk when planning for retirement. Your retirement may last for a long time, and you will need to have enough income to live comfortably without running out of money.
In 2018, Gallup surveyed retirees about their retirement income. The top income sources for Americans were:1
57 percent Social Security benefits
37 percent Employers’ pension plans
27 percent 401(k), IRA, or other retirement plan savings
19 percent Home equity
17 percent Taxable savings and investment accounts
15 percent Stocks, bonds, and other investments
Clearly, Social Security is the cornerstone of retirement income for many Americans, and it delivers a steady stream of income for life.
How long have you been paying into the Social Security system?
Americans contribute to the Social Security system throughout their working years. Every pay period, money is deducted from our paychecks to fund Social Security and Medicare. This payroll tax is called FICA (Federal Insurance Contributions Act).2
During 2018, American workers pay 6.2 percent of their income, up to $128,400 in earnings, into FICA. Employers also pay 6.2 percent. If you are self-employed, you pay the entire 12.4 percent.2
The money goes into the Old Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds, which pay Social Security benefits. These are two distinct funds, although, they are often referred to as a single entity: OASDI.3, 4
An additional 1.45 percent is withheld for Medicare’s Hospital Insurance program and matched by your employer. If you’re self-employed, you pay the full 2.9 percent.5, 6
The money paid to the OASI and DI Trust Funds is used to pay benefits to:5
- Current retirees – a group that may include your parents and grandparents
- People with disabilities – a group that may include friends and loved ones
- Survivors – a group that may include spouses or children
- Dependents – a group that may also include spouses and children
Social Security benefits can help minimize longevity risk
There are many different Social Security claiming strategies. The one you choose will depend on a variety of factors, including your current savings, your health (and the health of family members), your legacy goals, and other issues.7 If you’re not familiar with claiming strategies, talk with your financial professional before registering for benefits.
Timing makes a difference, too. In general, you can take benefits early (if you’re willing to accept up to a 30 percent lower benefit), take benefits at ‘normal’ retirement age, or delay your benefits and receive a higher payment.6 If you’re married, the decision can affect how much income your spouse and dependents receive, as well.
If you can afford to delay taking benefits, you may be able to minimize the risk associated with increasing longevity because you’ll receive more monthly income from Social Security once you start to take it.7
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3 https://www.ssa.gov/oact/progdata/taxRates.html (Click on OASDI to see the trusts as separate entities)