During the next 15 years, more people are projected to retire than in the previous history of the U.S., combined. This wave began when the 1st baby boomer, Kathy, started collecting Social Security back in 2007. According to Pew Research, the baby boom wave of retirees is now reaching Tsunami levels, with 10,000 people turning 65 every single day, a trend that is expected to continue for the next 18 years. That equals 70 million retirees, many with the same question: When should I start taking Social Security?
Although these numbers are startling, the impacts of the baby boom generation and their anticipated retirement dates have been known for quite some time. What makes this retirement tsunami so dangerous, however, is how unprepared many people are for the risks lurking beneath the seemingly calm retirement waters, specifically those involving longevity.
Back when Social Security Act was signed in to law by Franklin Roosevelt in 1935, setting the Full Retirement Age (FRA) to 65, the average life expectancy in America was around 62. That means that policy makers did not expect many people to utilize Social Security, let alone for 10, 20 or 30 years into retirement like we are experiencing today. Although adjustments have been made to Social Security over the years, like increasing the FRA to 67, not enough has been done to keep up with the changes in longevity, life expectancy and birthrates. Today, the average life expectancy for a person age 65 is around 84, with increasing chances of one spouse living into their 90s.
For those retiring at age 65 and living into their 90s, the longevity risk of outliving their available resources becomes a very real danger. Coupled with poor market returns and “sequence of returns risk”, the challenge of stretching resources to supplement income from Social Security and pensions into one’s 90s becomes more and more difficult. That is why the decision surrounding Social Security are so important. Unlike IRAs, 401ks and other defined contribution plans, Social Security income and Pensions are defined benefit plans, generating income that cannot be outlived.
Many individuals believe that the best Social Security strategy is to start as soon as possible, at age 62. However, after some careful analysis using the current life expectancy assumption of 84 years, the lifetime benefits are dramatically lower when starting at age 62 than if waiting until FRA, age 67 for most individuals going forward. In a recent example, the difference amounted to over $220,000 in lifetime benefits. That difference balloons to almost $370,000 if living until age 92.
Imagine how you could utilize that amount of extra income, especially given the increasing costs of healthcare. Coordination of spousal and survivorship benefits and forecasts about earned income before FRA are also important considerations that can greatly alter the total lifetime benefit from Social Security. Everyone’s situation is different, but the mistakes can be costly in the long-run. The best way to avoid these mistakes is to start by analyzing the different scenarios for your unique situation so you can make a more educated decision about your retirement. We have the tools and resources to help you with these steps.
In next month’s segment, continuing on the Social Security topic, we will look at some of the recent changes that went into effect, including removal of some spousal coordination benefits and changes to the Medicare Part B premiums that are deducted from Social Security checks.
As you think about your own situation and the complexities of the various aspects of Social Security planning, we are here to provide advice, guidance and our expert analysis. In addition to various projection tools and reports we make available to our clients, we also have a free Social Security e-guide, which you can receive by responding to this email to request a copy. We will also be hosting several educational workshops in the Annapolis area on this topic before the end of the year, so stay tuned for more details and how you can register to attend.
Shar Gogerdchi, CFP®