One of the most important and popular "sub-specialties" in financial planning is "Retirement Income Planning". As baby boomers approach retirement many are fearful of that nagging question, "do I have enough savings to ensure that I do not outlive my money in retirement?". Unfortunately, many financial planners are ill prepared to do a comprehensive retirement income plan for their clients because they lack in-depth knowledge of the 2,700 rules which govern social security and the many filing strategies available to maximize benefits.
For most retirees, social security will typically make up 30-60% of their income in retirement. Therefore it is critical that individuals seek expert advice on the optimal filing strategy to maximize the value of their social security benefits as part of their overall retirement income plan.
When it comes to retirement income planning strategies, American's are not as knowledgeable as they need to be. Only 20% passed The American College's recent "Retirement Income Literacy Quiz". On that quiz, only 30% of people age 60-75 recognized that deferring Social Security by two years or working two years longer would have more impact on their retirement security than saving 3% more in the five years prior to retirement. The following are some tips which may help retirees with their retirement income planning.
For starters, selecting the right investments is NOT your most important decision in retirement income planning. Surprised? For approximately two-thirds of retirees, more than half of their retirement income comes from Social Security! That means that for the average American, choosing when and how best to claim Social Security benefits (as well as when to retire and how to use home equity) has a much greater impact on retirement security than how to invest financial assets.
Another fundamental misconception by many individuals approaching retirement is that they mistakenly believe that choosing "when to retire" and "when to start Social Security benefits" are a single decision. They don't realize that there may be enormous value in deferring the start of Social security benefits and that you can, and in many cases should, commence benefits sometime after retiring and not necessarily when you retire from your job.
If you defer Social Security benefits from age 62 to 70, your benefits increase by 7-8% each year (the benefit at age 70 is 76% more than at age 62). Too few Americans know this. In the Retirement Income Literacy Survey, only 54% realized that deferred benefits increase each year up to age 70.
Furthermore, Social Security is an inflation-adjusted annuity which will pay you as long as you live. Unlike probably all the other investments in your retirement portfolio, Social Security is likely the only asset which offers annual cost of living adjustments to help you keep up with inflation throughout your retirement.
Certainly, unless your other retirement income assets are generating 7-8% guaranteed annual returns, it would probably be optimal to draw down from those other assets in order to defer the start of your Social Security benefits. However, the challenge in retirement income planning for those who retire prior to receiving Social Security benefits is how best to fill the "income gap" until Social Security benefits commence.
Some possible strategies to consider include working part-time in retirement, using other retirement assets, possibly tapping into home equity through a reverse mortgage or taking the lower of the two spouse's social security benefits first and deferring the larger of the two benefits. By deferring the larger of the two Social Security benefits you are also maximizing the Social Security survivor benefit, which is a critical consideration in retirement income planning.
As is commonly seen in financial literature, the base of "The Retirement Pyramid" is composed of your guaranteed income sources (Social Security, pension income and annuities) and for good reason. The more guaranteed income you have in retirement the lower the risk of out living your money, which is the most common fear of most retirees. Deferring the start of Social Security benefits is generally the least expensive way, and often the optimal strategy, to acquiring more guaranteed lifetime income throughout retirement.
Ash Ahluwalia, NSSA, CCSCA, MBA