Sid Mittra
    Emeritus Professor

Confusion Abounds. Social Security (SS) is the most trusted source of retirement income. And yet, when you ask questions like: How much SS income do you expect to get, what is the best age for starting to receive SS income, will SS eventually go bankrupt, do women receive less SS income than men, and so on, you get a stunned silence or a confounded look. 

Today we will explain in simple terms everything you need to know about SS income, and also guide you to sources dealing with more advanced treatment of the subject.   

The Basics. The normal age for starting to receive SS income is 66.2 years (soon changing to 67). Your basic SS income is calculated based on your highest 35 years of inflation-adjusted income. You can estimate your SS income here.

SS Income Collection. If you apply for SS benefits along with your spouse, you will be paid your own benefit first, and the spousal benefit will be added if your own benefit is less than half of your spousal benefit. A person can collect benefits based on the spouse’s higher income if  i) the spouse is collecting SS benefits, and ii) the person has attained full retirement age. Also, a person can receive a survivor benefit when a spouse dies, and (most frequently) the spousal benefit will equal the benefit of the deceased spouse. For information on other special situations, such as divorced couples, same sex marriages, and so on, please click on the following link: https://www.ssa.gov/pubs/EN-05-10024.pdf

Best Starting Date.  The earliest and latest starting dates are ages 62 and 70, respectively. Your SS income is based on your P.I.A. If for financial or health reasons you must start at age 62, then that is the best starting age for you. Note, however, that by starting early you will automatically lower your monthly income by 25% for life. Of course, if you have no reason to start early or even at age 66 and can wait until 70 (no additional benefit for waiting after that), then your monthly income will increase by 8% per year—a sizeable financial benefit indeed.  

Incidentally, before deciding whether to start taking your SS income at age 70 or at the normal age of 66, you can calculate the break-even point when your decision to wait until 70 would begin to pay off (usually age 82 or 83). You can find details of break-even calculation here.

https://www.investopedia.com/ask/answers/020615/how-do-i-calculate-my-social-security-breakeven-age.asp

Guaranteed Lifetime Income. SS Income is guaranteed for life. True, you constantly hear about SS going bust by 2030. We urge you to have faith on our Congress. Our government will surely fix this problem in time to protect its stellar reputation in the world. 

Withholding Income. Until you reach your full retirement age of 70, if you start collecting SS benefits, the Administration will withhold (in 2019) $1 for every $2 you earn above $17,640 ($3 for every $1 of incomes of $46,920 of higher). However, you will get the withheld amounts back after you reach full retirement age.  

Taxing SS Income.  Except for lower-income retirees, SS Income is taxable, even though you paid SS taxes during your entire working life.  If you are receiving SS income and your joint income is $32,000 or higher, some portion of your benefit will be taxed. A savings grace: No more than 85% of your SS income is taxable. 

Adjustment for Inflation. Each year, Social Security retirement benefits are adjusted for inflation. For 2019 the adjustment rate was 2.9%.

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Travis Smith, CFP, provided technical support for this article.  However, only the author is responsible for its contents.  

Sid Mittra
    Emeritus Professor

Simple Savings Number.

Wouldn’t it be nice if someone came up with a simple savings number which, if followed routinely, would guarantee comfortable retirement? Well, George Kramer claims he has done just that. Here’s how he puts it:  

As soon as I turned 10, I started earning money mowing neighbor’s lawn and doing odd jobs for them. On my first working day, dad said: “Son, every time you earn a dollar, put away 10 cents in a piggy jar and then spend the rest as you wish. And remember to keep up with this savings habit until you retire.” George followed his dad’s advice, and guess what? He retired more comfortably than he ever dreamed.  And so, according to George, the elusive savings number everyone is looking for is 10% per year.

Is 10% A Real Number?

It seems so, at least according to an important study by EBRI (Employee Benefits Research Institute), which analyzed savings habits of millions of Americans. After taking into account  critical information like individual contributions, social security income, shifts in economic conditions, and changes in life expectancy, the EBRI study concluded: A contribution rate of 10% starting in your mid-20s cuts the risk of running out of money in retirement to about 30%. 

But that is not the final outcome. This 30% failure number drops dramatically when the following omissions are corrected. 1. The EBRI study recognizes only about 65% of all incomes reported to the IRS. 2. The study ignores significant increases in income due to promotions and changes in employment. 3. It does not take into account the current trend toward establishing two-income households.  When these factors are recognized, the 30% failure rate associated with a long-term 10% savings plan drops dramatically, perhaps to the 5-10% level.  And that is the most welcome outcome anyone can aspire for.   

Gotbaum article adds bells and whistles

The Jashua Gotbaum Article adds the following bells and whistles to the EBRI study to improve the value of the study’s outcome.

1. The article recognizes the contribution of the employer. If your employer contributes 4%, you need to set aside only 6% to meet your retirement savings goal. And that makes it much easier to meet the 10% savings goal. Of course, if you are self-employed or your employer does not contribute, then you need to save 10%.

2. Many fear that the “golden years might be without the gold.” People are living longer. Women live longer than men. The laws regarding important entitlements and safety nets are constantly changing. Cost of living might go through the roof. Long- term illness might impose unbearable cost on the family. The list is endless.  Gotbaum recognizes that, if not handled properly, any one of these factors can derail the retirement plan.

3. Even during productive years well-laid plans can explode. A sudden loss of job, a prolonged illness, prohibitively expensive college tuitions, exploding medical costs, decision of the homemaker to obtain higher education in preparation for entering the labor force—all can threaten the simple savings plan. The article cautions that care must be exercised in handling these situations as and when they arise, so the retirement goal can be successfully met.   

The Bottom Line

Saving a total of 10% (employer contribution plus individual contribution) preferably from mid-twenties, almost always fulfills the retirement dream. However, as stated earlier, conditions can change.  

For instance, a life threatening sickness, decision to pay for ailing parents, children going to expensive colleges, unexpected loss of job of the sole income earner, spike in inflation, a significant raise in a better paying job, homemaker’s decision to enter the work force after obtaining the necessary training—all of these incidents can affect the final outcome of the 10% savings plan, both negatively and positively.  Therefore, you need to be vigilant and take appropriate action when practical or warranted by changing conditions.  

Of course, an integral part of the final outcome also rests on how successfully these savings are invested over the long run and how the tax issues impact the withdrawal of retirement savings

That said, for most Americans a long-term 10% savings plan, associated with a possible failure rate of a mere 5-10% upon retirement, leads to the best possible outcome and saves people from the consequences of dangerous neglect or inaction.   Let me close by adding the following caveat: If you wish to adopt a more sophisticated savings plan that changes annually or whenever your personal situation changes, then by all means find a certified financial planner who will develop a mathematically-sophisticated savings model for you. But for the rest of us, which represents 40 million plus  Americans, our simple savings number plan may well be sufficient.

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I hope you enjoy reading my blog, and will consider signing up as well as recommending it to your friends. Please sign up here.

If there is any specific topic you would like me to address, offer feedback on any published article, content piece, newsletter or just say hello, please get in touch with me here.

Travis Smith, CFP, provided technical support for this article.  However, only the author is responsible for its contents.