The government recently announced an increase in the amount of Social Security benefits people receive. Unfortunately, it’s only 2.8 percent. While that’s the most significant jump in seven years, the increase equates to just $39 a month for the average benefit payout of $1,461.
Remember, there’s a link between Social Security benefits and inflation. Therefore, the extra $39 a month does nothing more than help individuals keep up with the cost of living. In other words, the money won’t do anything to enhance the standard of living during the retirement years. Most concerning is the potential risk of going backward. This is something that worries people who’ve already retired or those thinking about doing so.
A Study Of The Future
The Schwartz Center for Economic Policy Analysis performed a study that rang some alarm bells. The generated information shows that roughly 40 percent of middle-class Americans will either live very close to poverty or actually live in poverty by the age of 65.
For the sake of example, look at people at the age of 62. This is when most choose to retire simply because it’s the earliest age for receiving Social Security benefits. If you earn an average income and decide to retire at this age, you’ll start receiving $17,532 next year in benefits. That amount is quite a bit more than the current poverty level of $12,060.
That sounds okay, right? Not really. The reason is the thresholds determined by the Federal Government are ridiculously low. In fact, they’re so low that some of the most prominent economists double the government’s benchmarks. As stated by one of the authors of the study mentioned, the poverty level in the US should actually be $24,120.
This author said, “We base it on what we call the level of ‘economic deprivation.’†Simply put, millions of older people in the US could easily end up in poverty. You could use identical ratios and apply them to couples who both worked. In that case, one of them could end up collecting “spousal benefit,†which equates to only 50 percent of what the other individual receives.
Realistic Expectations
All of this seems confusing. To summarize, by the time you’re ready to retire, you shouldn’t expect to receive much from the government. Not only that but based on several factors, you might have to pay taxes on some of your Social Security retirement payments. If that happens, you would ultimately have to return a portion of your income to the government.
Taking everything into account, the best thing that people can do is have either a personal savings account or a pension, or both. Sadly, statistics show that more than 90 percent of people in their 50s who work don’t have a pension. Making matters worse, more than 45 percent don’t have a 401(k), IRA, or some other type of retirement plan.
Along with the stress that this causes people who want to retire, the absence of a savings account or pension also puts a lot of pressure on Social Security. That fact that millions of people will be 100 percent dependent on government benefits when they retire is a massive problem. After all, this program was not designed to serve as a sole source of income. Instead, the government created it as supplemental income to personal savings and pensions.
Doing the Math
When you turn 62, you have the option of starting your Social Security benefits. However, by doing so at that age, the amount you receive will be much lower than if you waited until age 65 or even older. In other words, the longer you wait to retire and receive your benefits, the more money you’ll get. How much more? A lot.
Say you were born in 1960. That means you can receive full retirement funds when you turn 67. If for some reason you decide to start receiving your Social Security benefits at age 62, you’ll only get 70 percent of the monthly payout. This is because you chose to retire early.
Now, if you wait to retire until the age of 65, you’ll receive 86.7 percent of the monthly payout. The amount between age 62 and 65 is notably higher because you’re closer to the age of full retirement benefits. Of course, if you don’t take your benefits until you turn 67, then you’ll receive 100 percent of the monthly amount due.
I ran a Social Security what-if scenario in a really detailed retirement planning calculator called WealthTrace. I found that if a person lives to age 85, he or she is much better off delaying their Social Security payments until they are 70. How much better off? The typical person who has $30,000 in annual benefits would see about $80,000 more in lifetime benefits.
Married Couples
The equation changes for married couples. Considering the information released in the Schwartz Center study, you obviously want to do whatever you can to avoid retiring impoverished. Reputable financial advisors tell their clients to continue working until the age of 67 or whatever age at which they can receive full benefits.
Until then, it’s important for people to put as much money aside as possible, whether it goes into a personal savings account or retirement plan. It’s just as important for people to understand that what they envisioned the living standards in their “Golden Years†may prove to be something quite different.
Slashing Social Security
Perhaps one of the more unnerving pieces of news is that the government has indicated that by 2034, it could slash Social Security by as much as 21 percent. What does that mean? Just imagine retiring at age 62. Along with taking a 30 percent cut from the amount of benefits received there would be an additional 21 percent deficit. The hope of everyone is that the US government will find a solution before that happens. It all comes down to the politicians who recommend and establish new laws.
Summary
Instead of falling into poverty when you retire, you should schedule an appointment with a trusted financial advisor. You don’t have to wait until you’re in your 50s or 60s to do that. Rather, start putting a plan in place as early as you can. The ultimate goal — avoiding poverty when in retirement.
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