How Social Security Fits into Your Retirement Plan
90% of Americans age 65 or older receive monthly Social Security payments1. While it probably isn’t enough to live on, it will likely be a significant part of your financial plan.
The statistics are clear: Social Security comprises up to 34% of the average retiree’s income. Moreover, 71% of individuals and 48% of married couples count on Social Security benefits for at least half of their income. Your financial plan should account for your total monthly income including the Social Security benefits for yourself and your spouse.Understand how your benefits are calculated. The Social Security administration uses a formula to figure your annual benefit. The formula adjusts your reported past income for inflation and then averages together the 35 highest income years. You can then get that amount divided into 12 monthly payments. But your age makes a big difference in how much you actually receive.
Know your options. Your primary insurance amount (PIA) is what you can receive if you’ve reached full retirement age (FRA, 66 for folks born between 1943 and 1954, higher thereafter2). The amount will be less if you start taking payment at a younger age (starting at age 62) or greater if you wait beyond FRA (up to age 70). If you start at age 62, your PIA is reduced by 20% to 30%, but the reduction decreases each year. Your benefit increases annually by 8% for each year you wait after your FRA. Spousal benefits are at least half of the other spouse’s PIA.
Making up the shortfall. A common rule of thumb is that you’ll need 70% of your pre-retirement income to have a comfortable retirement3. But if you have big plans for travel and other expensive activities, you may need 100% or more of your pre-retirement income. Once you understand the limits of Social Security benefits, you have a good indication of how much you’ll need from other sources to support your desired lifestyle. Other sources could include annuities and rental properties.
Required Minimum Distributions (RMDs) You can start receiving penalty-free distributions from your IRA and 401(k) at age 59 ½. But thanks to a recent change, you don’t have to start taking RMDs until age 72. Moreover, you can continue to contribute to your 401(k) (and postpone RMDs) as long as you work. Most importantly, the Coronavirus Aid, Relief, and Economic Security (CARES) Act has suspended RMDs for 2020. However, you can still take distributions if you choose to and they will be taxed appropriately. If you have already taken your RMD for 2020, you will need to talk with a financial professional about your options.
A holistic plan is crucial. The earlier you work out your financial plan for retirement, the better able you’ll be to take the steps necessary to meet your goals. At SouthState Investment Services we would be delighted to review your retirement plan and help you optimize it to pursue your desired outcomes. Remember, it’s never too late (or too early) to get started, so contact us today.