Today's retirement income landscape is precarious indeed, if not a crisis. In addition to economic and demographic changes, public and private employers have systematically shifted the risk and responsibility of planning and preparing for retirement from themselves to the individual. Most workers are indeed ill equipped to manage these responsibilities due to, among other things, lack of education in financial planning, insufficient savings habits and an increasing cost of living (especially in health care and education). In fact, research indicates that over half of retirees are at risk of being unable to maintain their pre-retirement standard of living.
There are, however, a number of tools available to deal with this growing retirement crisis. One of the most effective strategies is to work longer than what is often considered the target retirement age of 65. Planning to retire at this relatively "young" age may no longer be economically viable nor, many would argue, beneficial from the standpoint of keeping your mind and spirit healthy.
Extending your working years even by a few years, perhaps into your late sixties or to age seventy, can have an enormous economic impact in reducing your risk of outliving your money in retirement. Studies have shown that the fear of outliving your money is greater than the fear of dying so addressing this issue is critical.
The additional income provided by extending your working years can not only provide additional savings but it can also allow your current savings to continue to grow. It will also shorten the number of years that you will need to provide retirement income without having the benefit of a paycheck.
Social security, already a critical component of retirement income, can play an enormous role in addressing the concerns surrounding the issue of outliving your money. By delaying the start of social security benefits your monthly retirement benefits can be increased significantly. By working a few more years, you may now be able to afford the option of delaying the start of social security benefits. This will allow you to maximize your social security benefits which, for most people is the only pension plan that they will have in retirement.
If you delay the start of your social security benefits from age 62 to 70 you can increase your guaranteed monthly lifetime income payments by 76% plus cost of living adjustments (COLA). If you reach age 66, by delaying the start of benefits from age 66 to 70, your benefits can increase by 8% per year (guaranteed) plus COLA. That could amount to as much as a 40% increase in your social security retirement check (assuming a 2% annual COLA) in just 4 short years. Since your social security benefits are based on your highest 35 years of averaged indexed monthly earnings, the opportunity to permanently increase your lifetime retirement check by 40% is an enormous opportunity at a time when few such options are available.
Not only will social security guarantee income for as long as you live, it increases your benefits with COLA, which is so important in helping to protect you from the ravages of inflation. Since we have been experiencing a protracted low interest rate environment for the past seven years, many people have forgotten how devastating inflation can be to their cost of living. The effects of inflation can be especially acute in your retirement years which makes the social security COLA benefit even more valuable.
For couples, by delaying the start of the social security benefits for the spouse with the higher benefit amount (typically the husband) you also therefore increase the "survivor benefit" for the spouse with the lower benefit amount (typically the wife). This is a critical consideration since women typically live longer than men and, as a widow, they will then be living on just one social security check and not two. It is also important to note that the survivor check is protected by COLA.
In summary, as life expectancies continue to increase and retirement years turn into retirement decades, the importance of maximizing retirement income is more critical than ever. Social security is uniquely designed with features and benefits to help protect you from many of the financial risks inherent in retirement. It's a complex system for sure but, by working with a social security income specialist, you can navigate your way through the system and design a plan to maximize your benefits and integrate these benefits with your other retirement assets in a tax efficient manner. You can then enjoy your hard earned retirement years with greater financial security and peace of mind.
Ash Ahluwalia, NSSA, CCSCA, MBA