Social Security is Not a Retirement Strategy

One of the biggest questions of those near retirement or in retirement ask is, “Will I have enough income during retirement to cover my living expenses?" The second biggest question asked is “Should I factor in Social Security (SS)”? Retirees should always include Social Security when creating their retirement portfolio.

The first thing you need to find out is if you are eligible for SS benefits. The time to find this out is at each job you work or by calling the Social Security Administration.

A common misconception by most people is that if SS taxes are taken out of your paycheck then you must be eligible for SS benefits. This is not true. Some employers do not pay into SS but are required to participate in a retirement plan. Find out whether your employer participates in SS and whether your position is be covered by SS. If jobs you work are not eligible for SS benefits and do not offer a retirement plan, you will need to create an alternative to make up for the missing income. Many federal government employees, certain railroad workers, and employees of some state and local governments are not covered by SS.

You will need at least 40 credits to be eligible to collect SS benefits provided you meet all the other requirements. If you are eligible for SS benefits the amount shown on your yearly statement, is an estimate and is not the amount you will receive when you begin collecting SS benefits. This is due to the windfall elimination provision reduction formula the Social Security Administration applies to determine your monthly SS benefit.

However, there are limits on how much you can earn while collecting SS benefits, and if you exceed those limits, your SS benefits will be considerably reduced. If your earnings exceed a certain level, up to 85 percent of Social Security benefits may be taxable. At full retirement age, no income restrictions apply and there is no penalty for additional income earned.

According to research by Prudential, SS benefits for those aged 65-74, accounts for 54 percent of total retirement income, for those aged 75-84, 61 percent and those 85 and older 66 percent.

One advantage of collecting SS benefits - it is guaranteed income for life that increases over time due to a mandatory Cost of Living Adjustment (COLA). COLA increases SS recipients’ benefits by a specific percentage because of yearly inflation. SS benefits also include spousal coverage. Benefits of a deceased recipient can be passed to a current spouse or child under age 18.

You must contact a Certified Financial Accountant (CPA) to determine the portion of your SS benefits that will be subject to taxes. You will also need to consultant a financial advisor to find out the best strategy to maximize your SS benefits. The best approach is to setup a meeting with your CPA and Financial Advisor and ask them to develop a strategy for you.

Most financial advisors do not calculate replacement rates the same way the Social Security Administration does which substantially changes the retirement income calculation. Ensure your financial advisor uses the Social Security Administration’s replacement rate to determine the most accurate retirement income calculation.

Unfortunately, most employees do not have a pension plan or retirement plan so their only income during retirement is Social Security. Pension plans are nearly extinct and employees now have to rely on employer provided retirement plans or their own personal savings in addition to SS benefits. In many instances, a combination of these is required to meet basic financial needs during retirement; some retirees may need all three sources. One factor to consider is living cost increases and many retirees are living longer. Other factors to consider: where you live, your needs, your health status, and your other financial obligations that can quickly erode your fixed monthly income. There are three options that you can take when collecting SS benefits:

·         Early retirement. If you take your SS benefits at 62, your monthly payments will be permanently reduced between 20% and 30%, depending on your date of birth.

·         Normal retirement. The "normal" or "full retirement age" that ranges from 65 to 67 depending on your date of birth.

·         Late retirement. You can wait until 70 to take your SS benefits.

Retirement must be carefully planned and must include the expertise of professionals such as a Certified Financial Accountant and Financial Advisor to ensure that you maximize your SS benefits and minimize your tax liabilities.