Retirement Readiness and Optimizing Social Security Benefits

Retirement Readiness and Optimizing Social Security Benefits

In the current Presidential election cycle, Social Security is a topic that has been central to the national dialogue. At Pauley Financial, we understand that most people who are planning for retirement are concerned about the stability of the Social Security program, and how they might make up for the shortfall it has the potential to leave behind. We typically trial a number of scenarios to help you plan in advance for, and optimize when the time comes, your Social Security benefits. Moreover, we will help you assess your probability of meeting your financial goals with or without Social Security (or somewhere in between), and determine a plan for adjusting to meet or revise those goals. Below is a thought piece from Financial Advisor Magazine on how working a few years longer can improve your ability to achieve financial freedom. We welcome your thoughts on it, and stand ready to assist as this social program evolves.

“Working Longer Greatly Improves Retirement Readiness”

Most people won’t be prepared for retirement at age 65, but they will be by age 70, largely because of increased Social Security payments, concludes a report by the Center for Retirement Research at Boston College.

The report, “National Retirement Risk Index: How Much Longer Do We Need To Work?” finds more than 85% of households would be prepared for retirement by age 70. “Many people will need to work longer than their parents did, but they will still be able to enjoy a reasonable period of retirement, especially as health and longevity continue to improve,” the report says.

The authors reached their conclusion by constructing a “national retirement risk index” measuring the share of American households that may not be able to maintain their previous standard of living after retirement. Using 65 as the age for retirement, the NRRI shows that 51% of today’s working households would not be able to maintain a preretirement standard of living in the wake of the Great Recession and financial crisis.

Note: Pauley Financial’s Multi-Portfolio Approach seeks to protect client portfolios from such risks by mitigating against the possibility of needing funds during such downturns.

The center builds the index by projecting the rate at which a sample of U.S. households would be able to replace their income in retirement, constructing a target replacement rate to maintain a preretirement standard of living and comparing the projected and target rate to find the percentage of households “at risk.”

The authors acknowledge that people don’t need as much income to maintain their standard of living in retirement because more of it can be devoted to spending—once people stop working they pay less in taxes, no longer need to save for retirement and often have paid off their mortgage.

The index shows that only about 30% of households are ready for retirement when the retirees are age 62, the earliest age at which they can take Social Security. “The steep improvement in readiness from ages 62 through 70 and the leveling off thereafter reflect the importance of Social Security and the pattern of benefits payments,” the report says. Social Security increases by about 8% per year between ages 62 and 70, after which benefits remain constant in real terms.

Another notable finding: Households with younger people are less prepared for retirement than those with older ones. In 2007, households headed by individuals from 50 to 59 years old were projected to be twice as likely to be able to retire at 62 than those headed by 30- to 39-year-olds (40% versus 20%). At age 70, the gap closes, but is not eliminated: 89% of 50- to 59-year-olds would be ready while 82% of 30- to 39-year-olds would be.

Why are younger people less prepared? The report cited three main reasons: They’ll need more assets in retirement since they are expected to live longer; they face a higher full-retirement age for Social Security; and fewer are covered by defined benefit plans and don’t appear to be saving more in 401(k) plans relative to their income than older people.

As mentioned, no matter where you are in life, we recommend planning ahead not only for Social Security, but also (and more importantly), for your financial freedom.