SEAN
WILLIAMS | THE MOTLEY FOOL | 11:55
am EST January 7, 2020
Just
two days ago on Jan. 1, Social Security marked its 80th anniversary of making
payouts to retired workers. Today, it's a program responsible for divvying out
more than 64 million benefit checks each month, many of which wind up in the
hands of seniors.
Just
how important is Social Security to these retirees? According to data from the
Social Security Administration (SSA), some 62% of retired workers receive at
least half of their income from the program.
Furthermore,
over 15 million retired workers are being pulled out of poverty each month
because of their payouts, based on an analysis by the Center on Budget and
Policy Priorities. Suffice it to say that deciding when to begin taking your
Social Security payout can have a big impact on your financial well-being later
in life.
Deciding
when to take Social Security is the most important decision seniors will make
Although
there are more than a half-dozen factors that can ultimately
affect what you'll receive or get to keep from Social Security, there are four
factors that really stand out. The first two, your work history and earnings
history, are inextricably tied at the hip. The SSA will take your 35
highest-earning, inflation-adjusted years into account when determining your
benefit at full retirement age. This is why working at least 35 years is so
important; otherwise, zeros are averaged in for each year when you didn't work.
The
third factor that helps calculate your payout is your birth year, which is
what's used to determine your full retirement age – i.e., the age at which you're
able to collect 100% of your monthly payout. For most Americans, their full
retirement age is 66, 67, or somewhere in between. Put simply, taking your
benefit prior to reaching your full retirement age means accepting a permanent
reduction. Conversely, waiting until after your full retirement age to begin
receiving your benefit can boost it above 100%.
The
last and arguably most important factor is your claiming age. Although eligible
beneficiaries can begin taking their payouts as early as age 62, Social
Security incents patience. For every year an individual holds off on taking
their benefit, their monthly payout will grow by up to 8%, up until age 70. All
things being equal, such as work history, earnings history, and birth year, a
person claiming their benefit at age 70 could net up to a 76% higher monthly
payout than an individual taking their payout as soon as possible (age 62).
With
this information in mind, waiting probably sounds like the way to go, but this
is often not what we see.
More
retirees than ever could choose to claim Social Security early this decade
Data
from the SSA shows that a vast majority of Social Security beneficiaries
(around 3 in 5) claim their payouts prior to turning 66. This means most
retirees are knowingly accepting a permanent reduction in their monthly payout
for life. And the crazy thing is, this trend of filing early for Social
Security benefits could actually accelerate throughout the 2020s.
If
you're wondering why beneficiaries would purposefully take their payouts early
knowing full well that their benefits would be reduced for life, look no
further than the annually released Trustees report. Every year, the Social
Security Board of Trustees releases its short-term (10-year) and long-term
(75-year) outlooks for the Social Security program. Since 1985, the Trustees
report has cautioned that long-term revenue generation would be insufficient to
cover program expenditures.
In the
2019 report, the Trustees estimated a $13.9 trillion cash shortfall between
2035 and 2093, with 2020 being the first year since 1982 where the program
would spend more than it brought in. The report also projects that Social
Security's nearly $2.9 trillion in asset reserves (essentially, its aggregate
net-cash surpluses since inception) would be completely exhausted by 2035.
In
layman's terms, this means lawmakers have 15 years or perhaps even less to
resolve Social Security's funding shortfall. Although Social Security won't go bankrupt, a lack of asset
reserves would force an across-the-board cut to benefits that, for retired
workers, could total up to 23%.
The
reason soon-to-be retirees might choose to take their payouts sooner than later
is simple: They fear a 23% cut to their benefits and have little or no faith in
a divided Congress to fix the issue at hand.
Is
claiming early a smart move?
Of
course, the question that should be asked is whether front-running possible
benefit cuts and pocketing as much Social Security income as possible is a
smarter move than waiting and counting on Congress to resolve Social Security's
cash shortfall. I'm not certain it's the right move.
Although
there are a handful of scenarios where an early Social Security
claim can make a lot of sense, taking your payout early because you expect
Congress to drop the ball probably isn't one of them. To begin with, if we look
back at Capitol Hill's track record, it has come to the program's rescue with
bipartisan solutions before. Chances are that, despite the political divide
that currently exists in Congress, lawmakers will work out a plan to resolve
the program's funding shortfall before 2035.
What's
more, waiting has been shown to be a statistically smarter move for most
retirees. A report from United Income that examined around 2,000 senior
households found that 70 was the optimal claiming age for a whopping 57% of
seniors and more than 4 out of 5 would have benefited by waiting
until at least age 67 before taking their payout. Comparatively, less than 7%
of retirees would have made an optimal claiming decision by taking their
payouts between ages 62 and 65.
It
should also be noted that a retired worker benefit is only designed to replace about 40% of the average workers' wages during
retirement. In other words, it's not meant to be a primary source of income. As
long as you're saving and investing for your future and have other sources of
income or savings to lean on during retirement, a future cut to Social Security
benefits won't prove devastating.
My
suggestion would be to really think twice before being lured into taking your
payout early because you believe a Social Security benefit cut could be coming.
The
Motley Fool has a disclosure policy.
The
Motley Fool is a USA TODAY content partner offering financial news, analysis
and commentary designed to help people take control of their financial lives.
Its content is produced independently of USA TODAY.
https://amp.usatoday.com/amp/40936449
No comments:
Post a Comment