Consider Social Security As Part of Your Investment Strategy
Last month as my office was closing down 2011, a friend and financial planner, Peter Mullen of Sherpa Financial, sent me an e-mail with the subject “How Much is Your Social Security Worth (to You)?”
I felt I knew a bit about Social Security, having recently edited the Social Security portion of a book expected to be published later this year. However, what I had not considered and what Peter drew to my attention is how important this benefit has become when compared to other investments now that investment rate of return has slowed so dramatically.
When retirees could expect an annual six percent or greater return per year, Social Security did not seem as important. Today, particularly for those of us who may live into our later 80’s or 90’s, a guaranteed monthly income for life is much more valuable.
While there has been debate about the details, a generally accepted idea is that, with some modifications, such as gradually increasing the retirement age potentially combined with some adjustment in cost of living increases, Social Security can continue into the foreseeable future. Even without adjustments, it would still be able to carry us into 2036 before any reduction in payment would be seen.
Peter’s e-mail cited another source intriguing enough to be carried here in part as follows. The author is Elaine Floyd, Certified Financial Planner at Horsesmouth.com, a planner who has developed a Social Security niche.
“Social Security is far more valuable than it used to be, and it is not just because of the 3.6% COLA announced last week. Scott Burns, in his October 2 column of the Denton Record-Chronicle, “How much are Social Security Benefits Really Worth?” asks how much cash you would need to generate the same amount of income that Social Security provides.
Back in 2000, when the yield on five-year Treasury obligations was 6%, you needed a lump sum of $162,843 to generate income equal to the average Social Security benefit of $840 per month. Today, with yields at 1.0%, you need $1.4 million to get essentially the same income. No wonder so many people are deciding to work from 2 to 10 years longer than they originally planned!
The dramatic reduction in interest rates has not only lowered the discount rate that makes a future income stream more valuable, it has increased the relative importance of Social Security as a source of retirement income. The $100,000 IRA that would have earned $6,160 in 2000 now earns only $1,000 a year. Higher returns are available elsewhere, of course, but not without risk. The result is that for most people, Social Security is likely to comprise a larger slice of the retirement income pie.
Many baby boomers are dealing with the unfortunate math caused by today’s low interest rates by continuing to work. So, for now, Social Security – for those who have started collecting – still represents a small slice of the retirement income pie. But at some point the earned income will stop. When that happens, Social Security will step in to comprise a greater slice of retirement income – 40%, 50%, maybe even more. You can improve your income flow from Social Security substantially, if you know the rules…”
In prior columns I have pointed to some of the decisions that can increase Social Security retirement benefits substantially. Here is a recap of only a few. Because it is complicated, it is a good idea to seek assistance to determine the best plan for you.
- Work at least 35 years in the Social Security system, where possible. Social Security retirement benefits are calculated on your best 35 years’ earnings. Where you have not worked 35 years while paying into the system, each year less than 35 is added in at zero. Even smaller incomes are better than zero so it is best, where possible, to work at least 35 years.
- Consider alternate strategies for husbands and wives. Married people might claim, for instance, one-half of their spouse’s benefit or all based on their own earnings’ record. One strategy is for a spouse to file for Social Security but suspend taking the benefit thereby allowing his spouse to qualify on his record. This is more complicated than can be explained here but can benefit spouses in the long term.
For more, listen to “50+ Planning Ahead” a weekly radio program on WCHE 1520 on every Wednesday from 4:30 pm to 5:00 pm with Janet Colliton, Colliton Law Assocs., PC, and Phil McFadden of Home Instead Senior Care.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.