Is Your Financial Plan Ready if U.S. Raises Retirement Age?
Being ‘ready’ involves more than just waiting as long as possible to start collecting your Social Security benefits.
This past April, the French government moved forward with raising the nation's official retirement age to 64 years old from 62. As expected, this news was met with loud, widespread criticism and protests in a country recognized worldwide for its sécurité sociale system that many want to emulate — and with a population that routinely rages against any type of pension reform.
Although the retirement age for most European countries is even higher (65-plus), it was still a tough pill to swallow for many French citizens, as President Emmanuel Macron wielded special constitutional powers to bypass Parliament and make the change.
Many are now wondering what would happen if the U.S., already with one of the world's highest retirement ages to collect full benefits (67 for everyone by 2027, still earlier for those born prior to 1960), eventually increases it. It’s well known the U.S. is facing a retirement crisis, with Baby Boomers and Millennials headed into their golden years facing potential cutbacks in Social Security benefits. Social Security trustees project the fund to run out by 2033 — and then pay only 77% of benefits currently projected, unless changes are made.
If the U.S. raises its official retirement age, will citizens take to the streets as they did in France? Perhaps. But one certainty is that anyone choosing to begin receiving Social Security retirement benefits at 62, the earliest possible age, will get much less than they initially thought. Currently, people born after 1960 will reduce their full benefit by 30% if collecting at age 62.
Now’s the time to consider how to maximize benefits, minimize dependency
While everyone’s situation is different, now is the right time to start thinking about ways you can maximize Social Security retirement benefits or minimize dependency on Social Security in case the full retirement age jumps or benefits are cut.
Many experts might say the best approach is to just wait it out — don’t start taking benefits until the age when you’re entitled to collect 100% of your benefits (currently that’s 67 years old for anyone born after 1960.) That’s certainly a good idea if you can literally afford to do so. But for those who can’t or don’t want to wait, there are other planning options.
Here are three tips for saving — for everyone from Boomers to Generation Alpha — before taking your Social Security benefits.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
1. Build up your savings outside of Social Security.
Most experts recommend setting aside 10% to 15% from each paycheck for a retirement savings pool, such as a 401(k) or individual retirement account (IRA). It’s not always easy, however. When you’re starting out in life, you’re still thinking about things like paying back school loans, marriage or saving money for a car or a house. But it’s important to make this a priority.
Even if you can’t save up to 15%, take advantage of employer matching contributions to your 401(k) to increase your nest egg. Hopefully, your income will rise as you get older, and so, too, should your retirement savings contributions — even if you start at 5%, increase gradually to 7%, 10% and so on, especially as you move into your 30s and 40s.
Also, keep in mind that contributing money to a traditional 401(k) lowers your taxable income, so you receive a double boost. Whether it’s a 401(k) or IRA, having these extra retirement funds apart from Social Security will serve as a buffer in case the retirement age increases or benefits are cut.
Other savings also increase flexibility to delay Social Security benefits at least to normal retirement age or beyond — which for many with reasonable life expectancies will produce greater total benefits from Social Security.
2. Put more work years under your belt.
It’s one thing to live longer, but it’s quite another to get those quality, high-earning work years in before you retire. The Social Security Administration calculates the benefits you’ll receive based on an average of your highest 35 years of earnings. So if you start working at 25, you’ll get your 35 years in by the time you’re 60.
While that doesn’t sound so bad, remember that earners typically make more as they get older. Once you start working past those 35 years, each year of additional earnings can knock off lower earnings from a previous year from your record (e.g., if you make $125,000 at age 61, that would replace the theoretical $30,000 you made at age 25).
The more you earn later in life to move the lower income out of the equation, the more you’ll receive when you decide to tap into your Social Security benefits. This also will enable you to keep increasing your other retirement funds, as mentioned above.
3. Consider your current (or ex) spouse.
For those who are married, if your spouse was a high earner, you could apply for spousal Social Security benefits when you reach full retirement age (currently 67). This allows you to receive up to 50% of your spouse’s benefit, so you need to carefully assess whether you’ll get a higher benefit from your own work record or your spouse’s.
However, it’s important to wait until full retirement age for this action; claiming spousal payments before that will reduce the benefits. You also need to wait until the higher-earning spouse reaches retirement age and starts collecting. Spousal benefits aren’t available before then.
Also, even if you’re divorced or widowed, you can still claim Social Security benefits on your ex or deceased spouse, as long as you were married for 10 years or more. Of course, the benefit you receive will also depend on when the ex or deceased spouse started earning toward Social Security.
You should also be aware that although spousal benefits are a percentage of the higher-earning spouse’s benefit at normal retirement age and don’t change if the higher earner delays benefits (up to age 70 with delayed credits), survivors benefits will increase if the higher earner delays benefits.
Remember this important caveat: These tips are general in nature. The permutations are almost endless when it comes to ways you can maximize the highest possible retirement income. It’s certainly a best practice to consult with a financial adviser in order to make the right decisions based on your specific situation.
Saving for retirement is often the most overlooked, complex and misunderstood financial decision people make. Be sure you’re working with a professional who can guide you most effectively to maximize your Social Security benefits.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
David Weinstock provides business succession, estate, insurance, tax, and investment planning services to high-net-worth individuals and business owners. His more than 28 years of experience are centered on delivering wealth advisory services to individuals and families. He specializes in complex estate planning matters, often integrating the efficient use of life insurance solutions to meet clients’ objectives. David has published in The CPA Journal and in Estate Planning Magazine and has been interviewed by the Wall Street Journal.
-
Six of the Worst Assets to Inherit
inheritance Leaving these assets to your loved ones may be more trouble than it’s worth. Here's how to avoid adding to their grief after you're gone.
By David Rodeck Published
-
Why Has Your Car Insurance Gone Up? (And What You Can Do About It)
Inflation, technology and bad drivers have jacked up everybody’s insurance rates, but there are a few things you can do to possibly lower yours.
By Karl Susman, CPCU, LUTCF, CIC, CSFP, CFS, CPIA, AAI-M, PLCS Published
-
If You Have a Pension, Smart Tax Planning Should Start Now
Adding pension income to Social Security benefits and income from required minimum distributions could see you facing a tax torpedo and higher Medicare costs.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
Nearing Retirement With Student Loan Debt? What You Can Do
Many older adults will struggle with rising costs (health care and otherwise) and not enough savings. Here’s how they can manage lingering student debt.
By Patrick M. Simasko, J.D. Published
-
Risk in Retirement: What’s the Right Level for You?
Your situation and retirement goals call for an investment approach that takes into account your risk tolerance, risk comfort and capacity for risk.
By Scott Noble, CPA/PFS Published
-
The Earlier You Take Advantage of Your 401(k), the Better
The power of compound interest can turn modest contributions into big savings for retirement.
By Rich Guerrini Published
-
How Non-Traded REITs Could Give Your Roth IRA a Boost
In addition to increasing the diversity of your portfolio, adding a non-traded REIT within your Roth IRA allows the resulting dividends to grow tax-free.
By Edward E. Fernandez Published
-
Tips to Help Single Women Struggling to Save for Retirement
The gender wage gap and taking time away from the workplace for caregiving duties make saving for retirement a bigger challenge for many women.
By Kristi Martin Rodriguez Published
-
A Letter of Wishes: No Legal Power But Powerful Nonetheless
A letter of wishes lets you explain, in plain language, your intent behind your estate documents, potentially heading off any misunderstandings or disputes.
By Steve Lockshin Published
-
If Cars With Touchscreens Are Unsafe at Any Speed, Why Do We Have Them?
Studies show how distracting car touchscreens can be, yet many automakers still use them, perhaps because they’re cheaper to upgrade than physical components.
By H. Dennis Beaver, Esq. Published