Is Your Financial Plan Ready if U.S. Raises Retirement Age?

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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.

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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.

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.

Doing Your Retirement Income Planning in the Right Order Matters

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.