By Robert Little, Jr., CFA, CPA | Vice President, Investment Strategy and Research | 05.21.2018
Retirement preparation tends to focus on asset accumulation and the income it can generate, so Social Security can be overlooked by successful savers because it doesn’t seem to fit neatly into this mindset.
The subject also invites misunderstanding given the perceived complexity of how Social Security benefits are calculated and what appears to be an income-benefit moving target depending on the age when retirees decide to file.
Social Security benefits can serve an important supporting role in retirement preparation for wealthy individuals and families. It’s worth gaining a better understanding of how the benefits work and the trade-offs in taking them at various ages.
Reading the Moving Target
Social Security essentially provides a pension benefit—a predictable periodic income stream—based upon your average annual salary over the course of your career. This benefit is capped for high-income earners around an average annual salary of $115,000. Anyone above this level could expect the maximum benefit, which would be[i]:
- $1959 per month if taken by someone turning 62 years old—the first year of eligibility—beginning in 2018
- The benefit rises to $2,640 per month if delayed until age 66
- It continues upward to $3,452 per month at age 70
Affluent retirees may expect Social Security income to play only a small role in their post-work spending plans. But even the reduced benefit at age 62 could easily offset a substantial portion of their monthly cash-flow needs.
Furthermore, couples in which both retirees have concluded high-income careers can double these figures, so their combined benefits might be expected to represent an even greater share of their monthly spending plans.
It may be helpful to think about your timing decision in terms of what it would look like in the bank. How much would our hypothetical retiree be able to accumulate if they filed before age 70 and saved all of their benefit income?
- From ages 62 through 69, our retiree would have amassed just over $225,000 in Social Security income and interest[ii]
- From ages 66 through 69, they would have accumulated about $138,000
This might seem to tip the argument in favor of filing early and then routinely saving and investing your extra income. But we touched on the prevailing counterargument earlier by showing that Social Security income rises over time when an eligible retiree delays filing for benefits. Specifically, monthly Social Security income increases between 6.5% and 8.5% for every year after age 62 that a retiree foregoes taking their benefit up until age 70. This represents a clear reward for delaying benefits.
There’s an appeal to both strategies: Social Security offers a clear reward for delaying benefits, but filing as soon as you’re eligible is as certain as money in the bank. Both paths highlight how Social Security can introduce a measure of predictability to retirement plans, which is why we think it deserves attention no matter which one aligns best with your goals.
[i] According to AARP’s Social Security Benefits Calculator
[ii] Using the 10-year U.S. Treasury yield of 2.87% as of March 27, 2018 for a conservative rate of return
If you still have questions or concerns regarding this topic, reach out to our retirement plan team experts—we would be happy to help.