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Posted: March 30, 2009

How “secure” is Social Security?

What you should do to maximize your retirement income

Wayne Farlow

With recent market declines, many people have had their retirement savings substantially reduced. With less retirement savings, the viability of Social Security has become more important than ever for both younger and older employees.

Will Social Security be available when you retire? In my opinion, Social Security will survive and be available, even for employees who are just entering the workplace. Social Security is a “sacred cow” for all politicians that wish to be re-elected. Because of this, it will survive, regardless of the future costs and its associated debt. However, at some point, the cost of maintaining the present Social Security benefits will be overwhelming. 

To offset the increasing costs of Social Security, the “Full Retirement Age” for younger workers will likely be extended beyond the current maximum of age 67.  The maximum level of earnings taxed will continue to increase beyond the current $106,800 and the combined Social Security tax rate of 12.4 percent will likely increase. There may also be “privatization” of a portion of Social Security taxes. “Privatization” would allow for government transference of some of the Social Security investment risk, as well as allow for inflation adjustments to be discontinued on the “privatized” benefits. 

With Social Security changes likely, what should you do to maximize your retirement income? If you are under 50, plan for your retirement as if Social Security benefits will not be available. While this scenario is highly unlikely, increasing your retirement saving will provide for a more abundant retirement, regardless of what happens to Social Security. If you are older than 50, your Social Security benefits will likely be unaffected by any future changes. However, since the Social Security rules are so complex, be sure you understand all of the variables before you begin taking benefits. As an example, many people believe that if they are fully retired, they should automatically begin taking Social Security benefits at age 62.  However, this decision could cost them thousands of dollars in reduced benefits.

Let’s look at a few strategies on when to take Social Security benefits:

Strategy 1 - If you will have any meaningful employment between age 62 and your full retirement age, wait until your FRA to begin your Social Security benefits. Any income above $14,160 annually will reduce your Social Security benefits by one dollar for every two dollars that you earn above that limit.

The next two strategies assume that you are in good health and that you do not require early Social Security benefits for your financial survival.

Strategy 2 – Even if you are fully retired, start taking your Social Security benefits at your FRA instead of age 62.  By doing this: 1) You receive annual Inflation adjustments based on benefits that are 33 percent higher;  2) You receive more total benefits if you live beyond age 77;  3)  If your benefits are greater than your spouse’s and you pass away before your spouse, your spouse can receive a 33 percent or larger payment.

Strategy 3 – If your spouse is younger and will receive a significantly lower benefit, consider waiting until age 70 to collect your benefits. This will provide you with a benefit that is 32 percent greater than your FRA benefit and at least 76 percent higher than your age 62 benefit. More importantly, if you die before your spouse, he or she will receive this increased benefit for the remainder of their lifetime, if they wait until their FRA to begin taking Social Security benefits.

These three simple strategies demonstrate the importance of making an informed decision concerning Social Security benefits. The approach that is best for you will depend upon your health as well as any spousal age and income differences. As part of your abundant retirement planning, get professional advice on the vagaries of Social Security before making your decision on when to begin taking benefits. Doing this may provide thousands of extra retirement dollars for you and your spouse.

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Wayne Farlow is the founder of Financial Abundance, LLC, a Registered Investment Advisor firm.  He is a Certified Financial Planner (CFP®), focusing on Retirement Planning, Investment Management, Small Business Owner Planning and Sudden Wealth/Inheritance Planning.  His book, “Financial Abundance Guide,” is available free at www.farlowfinancial.com .  He can be reached at wayne@farlowfinancial.com or at 303-554-0309.

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