Preparing for Retirement Income
According to the 2015 Risk and Process of Retirement Survey by the Society of Actuaries, 40 percent of retirees do not have a plan for how much money they will spend each year in retirement and where that money will come from. 19 To help you prepare for a possible reduction in Social Security benefits and/or an overall shortfall in your retirement income, calculate the general amount of income you expect to need in retirement.
Add up your monthly expenses and factor in a 3.32 percent long-term annual inflation rate (the average annual inflation rate from 1914 through 2014). 20 If the retirement age increases in the future, you may be able to continue working and delay your own retirement. However, if you need to retire before the full retirement age, you’ll need to factor in the potential for reduced Social Security benefits during those years.
You may receive a personalized estimate of your Social Security benefits by using the online Retirement Estimator at http://ssa.gov/estimator.
Once you’ve identified your level of benefits, subtract this amount from the total income you’ve calculated that you need. The balance will give you an idea of the amount that would need to come from other sources.
(Please note, this is a general calculation and not intended to be the sole basis of any financial decisions.)
Where Do You Apply? Contact Social Security at (800) 772-1213 or TTY (800) 325-0778 about three months before the date you’d like your benefits to start. You may also visit your local Social Security office or apply online at http://ssa.gov/ planners/about.htm.
Other Income Sources
For most Americans, Social Security offers a guaranteed source of income during retirement. Understanding your distribution options can potentially help optimize your benefits. However, Social Security was not designed to provide 100 percent of the income America’s retirees need throughout their golden years. In fact, Social Security represented just 33 percent of total retirement income in 2014, which means the average retiree still needs to provide 67 percent of his or her retirement income from other sources. 21
Typically, there are three ways to supplement Social Security benefits for retirement income:
1. Employer-defined benefit plans, also known as “pensions.” Unfortunately, the number of employer-sponsored plans continues to drop, from 103,346 in 1975 to 44,869 in 2014. 22 This leaves far more Americans responsible for a larger portion of their retirement income.
2. Work earnings. Many retirees choose to work long past traditional retirement age, or even retire from their career and then take a job or launch a small business to supplement other retirement income sources. In 2014, 32 percent of retiree income came from earnings — nearly the same percentage (33 percent) as Social Security benefits. 23
3. Savings and investments. Long-term saving and prudent investing may enable you to accumulate a significant nest egg from which to draw income. The following are two traditional retirement income account options: 24
a. Maximize contributions to a defined contribution employer plan, such as a 401(k), 403(b), 457 plan or Thrift Savings Plan. In 2017, participants may contribute up to $18,000, or $24,000 for employees age 50 and older.
b. Maximize contributions to a Roth or traditional IRA. If you are not eligible for a tax deduction for traditional IRA contributions due to participation in an employer-sponsored retirement plan, you may want to consider contributing to a Roth instead so you benefit from tax-free distributions during retirement. In 2017, participants may contribute up to $5,500, or $6,500 for those age 50 and older.
Want to learn more about what this means for you? Request a call from a Bayntree advisor today or join us at a Social Security Workshop on January 30th or February 1st.
Bayntree Wealth Advisors, located in Phoenix and Scottsdale, Arizona, provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.
Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.
19 The Society of Actuaries. January 2016. “The 2015 Risk and Process of Retirement Survey.” Page 132. Accessed April 4, 2016.
20 U.S. Inflation Calculator. March 16, 2016. “Consumer Price Index Data from 1913 to 2016.” http://www.usinflationcalculator.com/inflation/consumer-price-indexand-annual-percent-changes-from-1913-to-2008/. Accessed April 4, 2016.
21 Social Security Administration. “Fast Facts & Figures About Social Security, 2016.” Page 7. https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2016/fast_facts16.pdf. Accessed Nov. 11, 2015.
22 U.S. Department of Labor. September 2016. “Private Pension Plan Bulletin Historical Tables and Graphs 1975-2014.” https://www.dol.gov/sites/default/files/ebsa/ researchers/statistics/retirement-bulletins/private-pension-plan-bulletin-historical-tables-and-graphs.pdf. Accessed Nov. 30, 2016.
23 Social Security Administration. “Fast Facts & Figures About Social Security, 2016.” Page 7. https://www.ssa.gov/policy/docs/chartbooks/fast_facts/2016/fast_facts16.pdf. Accessed Nov. 30, 2016.
24 IRS. Oct. 27, 2016. “IRS Announces 2017 Pension Plan Limitations; 401(k) Contribution Limit Remains Unchanged at $18,000 for 2017.” https://www.irs.gov/uac/ newsroom/irs-announces-2017-pension-plan-limitations-401k-contribution-limit-remains-unchanged-at-18000-for-2017. Accessed Nov. 30, 2016.