Can Social Security Benefits Help with Longevity Risk?
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.
Retirement income planning can be like trying to hit a moving target in the wind. The target is moving forward and back because we do not know how long you will live in retirement. Will it be one day or 40 years? However, what you do need is certainty that you won’t run out of income in retirement. This is where Social Security steps into the picture.
According to the Social Security Administration, for just over 60 percent of retirees, Social Security represents more than half of all their retirement income.1 In 2020, roughly 65 million Americans will receive over on trillion dollars in Social Security benefits. 1 Social Security is a core part of the retirement picture in the United States.
In fact, Social Security is the cornerstone of retirement income for many Americans, and it delivers a steady stream of lifetime income that is adjusted for inflation. This means if you spend one day in retirement or 40 years, you cannot outlive your Social Security benefit.
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) and for self-employed it is called SECA.2
During 2020, American workers pay 6.2 percent of their income, up to $137,700 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
There is just one catch: The Social Security system is at risk
You should receive Social Security benefits for life – as long as they’re still available. While there is some concern about the funding of Social Security, American’s rely heavily on the system.
According to a recent Gallup survey, fewer Americans are concerned about the solvency of Social Security today than they have been in the past. It’s a notable state of affairs because the system is at risk. Justin McCarthy reported on Gallup.com:8
“Americans’ level of worry about the Social Security system is on the low end of the nearly two-decade trend, but the financial solvency of the program's fate is in jeopardy, as it faces long-term sustainability challenges.”
Unless changes are made, the OASI Trust Fund will be depleted by 2034. At that time, the income received will be enough to pay about 77 percent of scheduled benefits.9
Before you claim Social Security benefits, make sure you talk with your financial professional to determine which strategy best suits your circumstances. It is reasonable to consider the solvency of a system but remember that Social Security supports most retirees and without many would be in poverty. The system needs to be updated and will change, so keep an eye out for how the system might be updated and how this could impact benefits.
Sources:
1 https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf
2 https://www.ssa.gov/thirdparty/materials/pdfs/educators/What-is-FICA-Inf...
3 https://www.ssa.gov/oact/progdata/taxRates.html (Click on OASDI to see the trusts as separate entities)
4 https://www.ssa.gov/oact/progdata/oasdiRates.html
5 https://www.ssa.gov/pubs/EN-05-10024.pdf
6 https://www.ssa.gov/oact/quickcalc/early_late.html
7 https://www.nytimes.com/2017/02/18/your-money/retiring-longevity-plannin...
8 https://news.gallup.com/poll/232172/adults-nearing-retirement-worry-soci...
9 https://www.ssa.gov/oact/tr/2018/II_A_highlights.html
Disclosures
Securities offered through LPL Financial, Member FINRA/SIPC.
This material was prepared by Carson Coaching. Carson Coaching is not affiliated with the named broker/dealer or firm.
