The financial realities of being a woman — 4 out of 10 people—men and women alike—do not realize that women need to save more for retirement. Life expectancy, the pay gap, health care costs, and career interruptions due to caregiving are all contributing factors, according to Fidelity Investments Women Talk Money.
Video: 5 Investing Conversations to Have Now with guest: Anna Sale, host of the podcast “Death, Sex and Money” and author of “How to Talk About Hard Things”
Hosted by Lorna Kapusta, Head of Women Investors at Fidelity Investments
“Money is like oxygen. It’s all around us. We can pretend it’s not but we need it to breathe. When you don’t have enough you really feel it.” Anna Sale, host of the podcast “Death, Sex and Money” and author of the book “How to Talk About Hard Things”
“Money is at once a tool which is the choices we make around money, what we spend it on, how we save it”‘ says Anna Sale. “And money is also a symbol which brings up all these questions about am I enough, am I worthy enough, am I living up to all these expectations for myself. When we talk about money as a tool, sometimes the symbolic ways that money kind of makes us feel lots of big feelings can distort those conversations about money being a tool.”
What a joy it was to join @fidelity's Women Talk Money series. I think a lot about how to start conversations about money, and this really reinforced WHY we need to do it more. More talk –> more clarity on how money works and who it can work better for. https://t.co/jCqrx3VSdOpic.twitter.com/rrKAx0vZGs
A stock market pullback can pose a risk early in retirement.
Retirees face many risks when investing for retirement. Markets crash, inflation can eat into your returns, you might even worry about outliving your savings. And, there’s another big retirement risk: Sequence of returns risk.
Down markets can pose significant “sequence of returns” risk in the early years of retirement. Sequence risk is the danger that the timing of withdrawals from a retirement account will have a negative impact on the overall rate of return available to the investor, according to Investopedia.
A “sequence of returns” risk is basically about how the order, or sequence, of stock returns over time — combined with your portfolio withdrawals — can impact your balance down the road.
Once you start withdrawing income, you’re affected by the change in the sequence in which the returns occurred. During your retirement years, if a high proportion of negative returns occur in the beginning years of your retirement, it will have a lasting negative effect and reduce the amount of income you can withdraw over your lifetime.
Timing is everything. Sequence risk is the danger that the timing of withdrawals from a retirement account will damage the investor’s overall return. Account withdrawals during a bear market are more costly than the same withdrawals in a bull market.
“If there’s a big loss in the market and you’re taking withdrawals, you could be taking more from your portfolio than what it can make up for,” said certified financial planner Avani Ramnani, managing director at Francis Financial in New York. “If that happens early in retirement … the recovery may be very weak and put you in danger of not recovering at all or being lower than where you would have been and therefore jeopardizing your retirement lifestyle.”
One of the basic rules of investing is that a long-term strategy is self-correcting. And, for long-term investors — those whose retirement is many years or decades away — such market drops matter less because there’s time for their portfolios to recover from this risk before they need to start relying on that money for cash flow in retirement.
Retirement is a long game.
Since running out of money in retirement is the primary concern for most retirees, fortunately, there are options for mitigating the risk:
Plan to spend more conservatively since the less you spend consistently, the less you have to withdraw overall.
Withdraw and spend less when your portfolio performance is suffering.
Reduce the risk in your portfolio by creating a low stock allocation early in retirement but increase it over time, or use bonds for short-term expenses and stocks for long-term ones.
Set aside assets outside your investment portfolio that can support your spending needs when stocks are underperforming.
You may simply be able to meet your goals without taking on the risk that comes with stocks.
Key Takeaways
Sequence of return risk is basically the risk that market declines in the early years of retirement, paired with ongoing withdrawals, could significantly reduce the longevity of your portfolio. Thus, timing is everything, and in retirement early market declines, particularly if they are paired with rising inflation, can have a huge effect on how long a nest egg can sustain you in retirement.
The recommended way to mitigate sequence of returns risk when you can’t predict future market performance or future rates of inflation is by managing spending and/or keeping a portion of your portfolio in liquid assets, such as cash or bonds, to ride out the market downturn.
When market returns are high and inflation is low, retirees can distribute more from their portfolios, according to Forbes Advisor Staff Editors Rob Berger and Benjamin Curry. When market returns are negative and inflation is higher than expected, retirees reduce the amount of their annual distributions.
Remember, no one can forecast market performance or economic inflation. Yet, by managing your spending, you can adjust annual withdrawal amounts to reflect inflation and market returns.
“Americans aren’t saving enough for retirement and nearly half of people 55 and older have nothing saved for when they stop working. Government Accounting Office
Nearly one in four working-age Americans aren’t saving for retirement, and those who are say they aren’t saving enough, according to a PwC analysis. Further, a majority (55%) said they either are not participating in a workplace sponsored retirement plan like a 401(k) or they don’t know if they are in a plan.
The Government Accountability Office reports that nearly half of people 55 and older have nothing saved for when they stop working, meaning there is a building retirement-savings crisis and a wave of future retirees threatens to overburden an already fragile Social Security Administration. Consequently, this can upset a balanced economy that relies on older Americans spending money in the housing and health-care sectors.
Auto-enrollment retirement plans
Auto-enrollment and auto-escalation programs implemented by a few states have proved successful at closing that gap, particularly for workers in retail and service sectors of the economy. These sectors in the past have rarely offered retirement benefits to low-income staff.
In fact, plans that used automatic enrollment had a 92% participation rate in 2020, compared with 62% for plans with voluntary enrollment, according to Vanguard’s “How America Saves 2021” research. And, employees who worked for firms with automatic enrollment saved more than 50% more for retirement in 2020 than those employed at firms with voluntary enrollment.
Further, research shows that participants enrolled in a plan with automatic increase save, on average, 20% to 30% more after three years in the plan, compared with participants in an automatic enrollment plan that does not automatically increase participants.
As a result, Congress is proposing a Federal mandatory framework for workplace retirement plans. Starting in 2023, the retirement saving plan would require employers with more than five workers to automatically enroll new hires for retirement benefits, the contributions to which would automatically increase over time.
In short, businesses would automatically deduct 6% of new workers’ income into a low-cost retirement plan and automatically escalated that contribution to 10% over time, unless workers themselves opted for something different.
It’s mandatory for employers, but not their employees, who can choose to opt out of the savings plan or change their contributions. But the default choice would always be to signup, essentially making retirement funds a statutory benefit like unemployment or workers’ compensation insurance.
Failure to provide a low-cost retirement option such as a 401(k) or individual retirement account would cost a business an excise tax liability of $10 for every worker per day of noncompliance, which would add up.
Over the last two decades, continued adoption of automatic solutions has increased employee savings and the use of professionally managed allocations. Thoughtful retirement plan designs are helping people save and invest for retirement.
“One million dollars doesn’t buy as many Cadillac Escalades as it used to.”
Today, $1 million no longer buys as many McDonald’s Big Mac sandwiches or Rolex Submariner watches or Ford F150 trucks as it once did thirty years ago. There’s a good reason for that called ‘loss of purchasing power’ which is a byproduct of inflation. That’s because $1 million of purchasing power in 1970 was the equivalent of nearly seven million dollars today, according to Motley Fool. And as recently as 1990, a million dollars has lost half its buying power since then, meaning you’d need two million today to have the same buying power as you did in 1990.
As a result of normal inflation and loss of purchasing power, $1 million retirement nest egg today definitely will not offer you as comfortable a retirement lifestyle as it did a few years ago or a few decades ago.
Retirement is not an age, but a number
Financial preparedness is more important than reaching a certain retirement age. And, to answer the question of whether $1 million or any amount of money is enough for retirement, the answer depends on what you want your retirement to look like.
It’s important to ensure you have enough savings and income to sustain your spending and lifestyle in retirement. If you don’t have enough money set aside to pay for your retirement, then you may have to delay retiring. And no matter where you are on your retirement journey, you can make your financial number. No matter how little you have or how much time you have left until you want to retire, you can always improve your financial situation. Getting started and creating a retirement plan can carry you a long way.
A 2018 Northwestern Mutual study found that one in three Americans has less than $5,000 saved up for retirement, and 21% of Americans have no retirement savings at all. Overall, Americans are feeling underprepared and less confident regarding the financial realities of retirement, according to the data.
Despite these findings regarding the woeful retirement savings rate by Americans, it’s still not too late to enjoy the kind of life you’ve worked so hard for… and the retirement you deserve.
One of the most important goals for Ameriocans facing retirement is knowing that they can sustain their desired level of spending and lifestyle throughout their lives, with a sense of financial peace of mind and without the fear of running out of money. For our purposes, financial peace of mind is the knowledge that, no matter your level of savings or degree of market volatility, you are confident that you are unlikely to run out of money during retirement to support your level of spending and lifestyle.
Taking the financial road less traveled
Conventional wisdom recommend that older Americans should reduce their stock allocation in retirement and move into more safe investments such as bonds and cash. Although this may seem the less risky road to take in your retirement years, a few experts do not agree. If you expect to maintain your purchasing power into future, you must stay invested in stocks.
“The idea that a 60-year-old retiree should be investing primarily in conservative investments is an antiquated way of approaching personal finance”, says Jake Loescher, financial advisor, at Savant Capital Management in a 2017 U.S. News article. “Historically, the rule of thumb stated that an individual should take the number 100, subtract their age, which will define the amount of stocks someone should have in their portfolio. For a 60-year-old, this obviously would mean 40 percent stocks is an appropriate amount of risk.”
“A better approach would be to perform a risk assessment and consider first how much risk an individual needs to take based on their personal circumstances,” Loescher says.
According to the article, there are five circumstances when retirees should eskew conventionl wisdom:
The likelihood you’ll live into your 90s or beyond. Since life expectancy is much longer these days and in today’s low-interest environment, you face an increase risk of your nest egg not keeping up with inflation over the long haul.
If you don’t have enough cash for retirement. If you didn’t accumulate enough retirement assets to sustain an expected lifestyle, it becomes essential to decide how much capital in a retirement portfolio you’re willing to risk for the potential upside appreciation.
When interest rates are low. Low interest rates makes the capital risk seem greater than the value bonds might provide due to a loss of purchasing power. Taking a total-return approach, using low volatility, dividend-paying stocks to replace part of our typical bond component seems the best approach.
If you have estate planning needs. If you don’t depend totally on your investments for income, then your money may be providing a bequest for charity or an inheritance for children.
For historical purposes. The stock market has outperformed all other asset classes over the last century.
In retrospect, retirees will need to allocate a certain portion of their assets to higher-return equity investments to achieve long-term retirement objectives – be it longevity of assets, a desired level of sustainable income, the ability to leave a legacy, etc.
Essentially, the stock market has outperformed all other asset classes over the last century. And studies continue to show that unless you are within three years of retirement, the average variability of stocks relative to their returns is superior to that of Treasurys, municipal and corporate bonds. Thus, the right course of action is for older Americans to stay invested in the stock market past age 60 which will provide you at least 20 years, on average, to ride out the long-term volatility inherent in equities.
“Social Security’s trust funds will become unable to pay full benefits starting in 2034, one year earlier than estimated last year.” Social Security Administration Trustee Report
Social Security has two programs, one for retirees and another that provides disability benefits. The Old-Age and Survivors Insurance Trust Fund will become unable to pay full benefits starting in 2033, a year earlier than projected in 2020, while the Disability Insurance Trust Fund will become depleted in 2057, or 8 years earlier, according to Social Security Administration.
The U.S. economic recession caused by COVID-19 led to a drop in U.S. employment and a resulting decrease in payroll tax revenue, which accelerates the depletion of Social Security’s reserves.
When to claim benefits
You can start receiving your Social Security retirement benefits as early as age 62. And, there are advantages and disadvantages to taking your benefit before your full retirement age. Matter of fact, 31% of women and 27% of men claim their Social Security benefits as soon as they qualify at age 62 in 2018.
The primary advantage is that you collect benefits for a longer period of time.
The primary disadvantage is your benefit will be reduced. Each person’s situation is different.
The earliest you can apply for Social Security benefits is four months before the month you want your benefits to start, and the earliest your benefits can start is your first full month as a 62-year-old. For example, if you turn 62 in June, your benefits can begin in July, and you can apply as early as March. And, Social Security Benefits are actually paid one month in arrears in August.
There is an exception: If you were born on the first or second day of a month, you can begin collecting your benefits in that month.
You may need your Social Security Benefits as a source of guaranteed income to help pay bills, or if you anticipate not living long enough to reap the rewards of delaying.
If you start taking Social Security at age 62, rather than waiting until your full retirement age (FRA), you can expect up to a 30% reduction in monthly benefits with lesser reductions as you approach FRA.
Social Security replaces a percentage of your pre-retirement income based on their lifetime earnings. The portion of your pre-retirement wages that Social Security replaces is based on your highest 35 years of earnings and varies depending on how much you earn and when you choose to start benefits.
When you work, you pay taxes into Social Security and the Social Security Administration uses the tax money to pay benefits to:
People who have already retired.
People who are disabled.
Survivors of workers who have died.
Dependents of beneficiaries.
The money you pay in taxes isn’t held in a personal account for you to use when you get benefits. We use your taxes to pay people who are getting benefits right now. Any unused money goes to the Social Security trust fund that pays monthly benefits to you and your family when you start receiving retirement benefits.
Living in retirement
You’re officially retired and have worked hard to build up your retirement nest egg. As you transition your mindset from saving to spending, you’ll want to now change your focus: Protect what you have, don’t run out of money, develop a housing strategy for where you’ll live over the next 20–30 years, and hopefully, enjoy life as much as you can with your friends and family.
Claiming Social Security at 62 makes sense in several scenarios. Below are four reasons to consider filing as early as possible.
You’re out of work against non-voluntary – Many people are forced out of a job before they’re ready to retire. If you’ve been downsized and can’t find a new job, Social Security could help replace of your regular paycheck. Furthermore, the coronavirus pandemic has forced a lot of seniors out of the workforce, whether due to layoffs or health concerns. If you’re able to compensate for not working by claiming benefits early, do so since it’s a better bet than racking up debt.
You’re out of work temporarily and need money – Maybe you’re not working right now to address a health issue or lay low until the pandemic is over, but you’re confident you can get back out there in six months. In that case, claiming Social Security at 62 could be a smart move because you can actually use that money as a loan of sorts. One lesser-known Social Security rule is that you’re allowed to undo your filing once in your lifetime. If you claim benefits at 62 but are working again in a few months, you can withdraw your application, repay the SSA the benefits it paid you, and then file again at a later age so you don’t slash your benefits in the process. The only catch is that you must undo your claim and repay your benefits within 12 months. But if you can pull that off, you can collect Social Security on a temporary basis without locking yourself into a lower monthly benefit forever.
You’re tired of working and can get by on your Social Security paycheck – Maybe you have the option to work, but at this point in life, you’re tired of doing it. If your expenses are such that you can get by on your Social Security income, or a combination of Social Security and other income sources, then there comes a point when you should let yourself off the hook after a lifetime of hard work. If you’re going to claim Social Security early for this reason, you should make sure to have a healthy retirement savings balance to compensate for a lower monthly benefit.
You Have Minor or Disabled Children at Home – If you have children, eligible grandchildren, or even a spouse providing care for these children at home, these family members may be eligible for a benefit. There’s a rule that states that before benefits can be paid to anyone off of your work record, you have to be receiving benefits. That means filing early could make more sense than waiting. When combined with your benefits, the benefits to children and your eligible spouse can be up to 180% of your full retirement age benefit. If you have children at home that meet the criteria for eligibility, that’s an obvious reason to consider filing early.
It might seem like it makes sense to wait to file until full retirement age, then, when you’d receive $2,000 (versus filing at 62, when you’d only get $1,500 per month).
If you lived until 90, you’d receive an additional $70,000 in benefits for delaying filing until 66 instead of filing at 62. But this calculation doesn’t take into account the benefits paid to your children. While your children would be eligible for benefits based upon your retirement, the kids cannot get benefits until you file. That means your family would able to collect thousands of dollars more in lifetime benefits if you file early and turn on the benefits for your kids.
For every good reason to claim Social Security at 62, there’s an equally good reason to wait. On average, retirement beneficiaries receive 40% of their pre-retirement income from Social Security.
“Regardless of your income, estate planning is a vital part of your financial plan. Planning ahead can give you greater control, privacy, and security of your legacy.” Fidelity
A trust is an estate planning tool that anyone can use to ensure their assets are passed down as they wish, to friends, family or a charity. It is a legal entity that that allows a third party, or trustee, to hold assets until an intended recipient or beneficiary is able to receive them.
Trusts can be arranged in many ways and can greatly expands your options when it comes to managing your financial assets, whether you’re trying to shield your wealth from taxes or pass it on to your children or grandchildren.
To understand how a trust fund works, it helps to understand the following three terms:
Grantor. This is the person who transfers assets to a trust fund. That would be you, if you’re the one looking to start a trust.
Beneficiary. The person who is given the legal right to assets in a trust fund is a beneficiary. That might be your loved ones or a favorite charity.
Trustee. The decisionmaker responsible for ensuring the assets in the trust fund are appropriately distributed is called the trustee.
Trusts can hold assets like real property (such as heirlooms or jewelry), real estate, stocks, bonds or even businesses.
Since trusts usually avoid probate, your beneficiaries may gain access to the trust’s financial assets more quickly than they might to assets that are transferred using a will. Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death.
Assets in a trust may also be able to pass outside of probate, saving time, court fees, and potentially reducing estate taxes as well.
Other benefits of trusts include:
Control of your wealth. You can specify the terms of a trust precisely, controlling when and to whom distributions may be made. You may also, for example, set up a revocable trust so that the trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.
Protection of your legacy. A properly constructed trust can help protect your estate from your heirs’ creditors or from beneficiaries who may not be adept at money management.
Privacy and probate savings. Probate is a matter of public record; a trust may allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.
There are several basic types of trusts
Marital or “A” trust – Designed to provide benefits to a surviving spouse; generally included in the taxable estate of the surviving spouse
Bypass or “B” trust – Also known as credit shelter trust, established to bypass the surviving spouse’s estate in order to make full use of any federal estate tax exemption for each spouse
Testamentary trust – Outlined in a will and created through the will after the death, with funds subject to probate and transfer taxes; often continues to be subject to probate court supervision thereafter
Revocable vs. irrevocable
The major distinction between trust is whether they are revocable or irrevocable.
Revocable trust: Also known as a living trust, a revocable trust can help assets pass outside of probate, yet allows you to retain control of the assets during your (the grantor’s) lifetime. A living trust is a legal document that states who you want to manage and distribute your assets if you’re unable to do so, and who receives them when you pass away. Having one helps communicate your wishes so your loved ones aren’t left guessing or dealing with the courts. It is flexible and can be dissolved at any time, should your circumstances or intentions change. A revocable trust typically becomes irrevocable upon the death of the grantor.
You can name yourself trustee (or co-trustee) and retain ownership and control over the trust, its terms and assets during your lifetime, but make provisions for a successor trustee to manage them in the event of your incapacity or death.
Although a revocable trust may help avoid probate, it is usually still subject to estate taxes. It also means that during your lifetime, it is treated like any other asset you own.
Irrevocable trust. An irrevocable trust typically transfers your assets out of your (the grantor’s) estate and potentially out of the reach of estate taxes and probate, but cannot be altered by the grantor after it has been executed. Therefore, once you establish the trust, you will lose control over the assets and you cannot change any terms or decide to dissolve the trust.
An irrevocable trust is generally preferred over a revocable trust if your primary aim is to reduce the amount subject to estate taxes by effectively removing the trust assets from your estate. Also, since the assets have been transferred to the trust, you are relieved of the tax liability on the income generated by the trust assets (although distributions will typically have income tax consequences). It may also be protected in the event of a legal judgment against you.
Deciding on a trust
State laws vary significantly in the area of trusts and should be considered before making any decisions about a trust. Consult your attorney for details.
As mentioned above, by creating a trust, you can:
Determine where your assets go and when your beneficiaries have access to them.
Save your beneficiaries (your children, for example) from paying estate taxes and court fees.
Protect your assets from creditors that your beneficiaries may have, or from loss through divorce settlements.
Direct where remaining assets should go in the event of a beneficiary’s death. This can be helpful in a family that includes second marriages and step-children.
Avoid a lengthy probate court process.
This last point is a crucial one, as trusts also allow you to pass on assets quickly and privately. In contrast, settling an estate through a traditional will may trigger the probate court process — in which a judge, not your children or other beneficiaries, has final say on who gets what. Not only that, the probate process can drag on for months or even years and may even become a public spectacle as well.
With a trust, much of that delay can be avoided, and the entire process is private, saving your beneficiaries from unwanted scrutiny or solicitation.
“Choosing what age to start collecting Social Security retirement benefits and which type of benefit to claim are extremely challenging and difficult.”
Social Security is a program managed by the federal government (Social Security Administration). The program works by using taxes paid into a trust fund to provide Social Security benefits to people who are eligible. It provides you with a source of income when you retire or if you can’t work due to a disability. It can also support your legal dependents (spouse, children, or parents) with benefits in the event of your death.
Understanding your Social Security benefits and when to claim those benefits can be challenging and complicated. “There are 2,728 rules in the Social Security handbook,” said Laurence Kotlikoff, Boston University economics professor and Social Security expert. “And then there’s literally hundreds of thousands of rules about those 2,728 rules. It’s the most complicated system I think mankind has ever developed.”
As a result of the program’s complexity, most Americans do not have a good understanding of Social Security, according to a Nationwide Retirement Institute® 2021 Social Security Survey. Moreover, many people don’t know what they don’t know:
Social Security is a “pay as you go” program; most of the Social Security taxes paid by today’s workers go straight to the benefit checks for today’s current retirees.
Only 16% know what age they are eligible for full Social Security benefits. For those born in 1960 or later, full retirement age is 67.
45% believe Social Security benefits will go up automatically when reaching retirement age after filing early. Filing early locks in a permanent reduction in Social Security benefits.
Half of U.S. adults (54%) don’t know what percentage of their income will be replaced by Social Security. It depends on lifetime earnings, but for middle-income individuals the replacement rate is usually around 40%.
55% believe or don’t know Social Security benefits are tax free. They are for low-income taxpayers, but for most people up to 50% of benefits are taxable.
Source: Nationwide Retirement Institute® 2021 Social Security Survey
How much you will receive from Social Security when you retire depends on how much you’ve earned and how long you have worked under the Social Security system. Your retirement benefit will be calculated by the Social Security Administration (SSA) based on your average lifetime earnings, but only your highest 35 years of earnings will count and only the years that you paid Social Security taxes.
The amount you receive will also be affected by whether you start collecting benefits early (you’ll get less), whether you collect benefits late (you’ll get more), whether you work after you retire, whether other family members receive benefits based on your earnings record, whether you collect certain other government benefits, and whether the cost of living rises.
It’s important to understand that Social Security is designed to provide a safety net of income for the retired, the disabled, and survivors of deceased insured workers. And, a key consideration for when you claim Social Security benefits is to maximize your income for a retirement that could last longer than 30 years.
The contributions you and your employers make during your working years provide:
Current retirees and other Social Security recipients with payments
A guaranteed lifetime income benefit when you reach retirement
Your base benefit or primary insurance amount (PIA) is calculated according to your “full retirement age,” or FRA, and your FRA is determined by your date of birth. If you claim Social Security benefits any time before your FRA, you lock in a permanent reduction in monthly income. Claiming at 62 translates to a reduced monthly income of 25% to 32%, relative to your FRA monthly benefit. That means you may receive less monthly retirement income, every year, for potentially several decades.
By waiting until age 70, you can lock in increased monthly benefits. If your FRA is 67, your monthly income would increase 24% by waiting. The facts are:
Age 62 is the earliest you can claim your benefit
Waiting to claim Social Security after age 62 results roughly in 8% increase in monthly income per year for each year you delay claiming (up to age 70).
If your FRA is 66, your monthly income would increase 32% by waiting.
If your FRA is 66 years and 10 months (if you turned 62 in 2021), your monthly income would increase 29.2% by waiting.
While the government does not have a specific account set aside just for you with your FICA contributions (the taxes for Social Security and Medicare paid by you and your employer), one of the most powerful features of Social Security is that it provides an inflation-protected guaranteed income stream in retirement, ensuring against the risk you’ll outlive your savings.
Even if you live to 100 or more, you’ll continue to receive income every month. And, if you predecease your spouse, your spouse also receives survivor benefits until their death.
“As of 2021, due to increased longevity and a decrease in the number of workers per beneficiary, and if changes are not made to the existing system, the Social Security Administration’s surplus fund will be depleted by 2034.”
Social Security is primarily financed through a dedicated payroll tax. There are also two other sources that fund this pool of money:
Taxes on some recipients’ benefits
Interest earned on the pool of money (Surplus Fund)
“As of 2021, due to increased longevity and a decrease in the number of workers per beneficiary, Social Security will have to tap the surplus fund to meet its obligations. And, if current projections are correct, Social Security will have enough reserves to pay out 100% of its promised benefits until approximately 2034”, according to The 2020 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds from the Social Security Administration.
Although there is time for Congress to fix the problem, if changes are not made to the existing system, the surplus fund will be depleted by 2034. The original pool of money will still be funded by payroll taxes, benefit taxes and interest, but beneficiaries would begin receiving reduced benefits. Which means that benefits will remain fully payable until at least 2034, with 79% of benefits payable through 2093 and 73% of benefits payable thereafter. These estimates assume that the existing system remains unchanged.
In general, you can cancel your Social Security claim if you do so within the first 12 months of receiving benefits. But, you must repay the full amount you’ve received, and the full amount a current spouse or family member received based on your benefit. Then, you’re eligible to claim again at a later date and will receive a larger monthly payment. Each individual can only cancel a claim once in their lifetime.
“Social Security can add certainty and stability to a retirement income plan, especially given the surprises that may come at retirement.”
Claiming Social Security is an important part of your retirement income plan, but it can be challenging to understand your options—and the implications to your savings. Social Security can form the bedrock of your retirement income plan. That’s because your benefits are inflation-protected and will last for the rest of your life in retirement.
While it’s true that your monthly benefit checks will increase if you delay retirement until FRA, you’re not likely to get more money altogether by waiting. The whole reason early retirees get smaller checks while those who delay benefits get larger checks is so that the average person gets the exact same amount of money from Social Security during their lifetime.
Most Americans claim their benefits at age 62 or just a few years later, according to SSA. That’s not always a mistake. If they have done a good job of analyzing their situation. Claiming at 62 would reduce your monthly checks, but you would have an additional four to five years of income before you reach full retirement age. Based on the Social Security Administration’s life expectancy tables and projected inflation rates, the lifetime expected total benefits are within a few hundred dollars of each other, regardless of when you claim.
If you have a robust retirement fund and don’t necessarily need the extra money from Social Security, there’s no harm in claiming early, according to Motley Fool. Moreover, if you have reason to believe you may not live very long in retirement, you may want to claim earlier to make the most of your benefits.
Bottomline, Social Security is part of the retirement plan for almost every American worker. It provides replacement income for qualified retirees and their families.
Your decision about when to file for Social Security benefits will affect your income in retirement. However, if you’re worried about outliving your savings, delaying benefits might be one of the best retirement decisions you’ll ever make.
The highest Social Security benefit you or any retired American can collect at age 70 in 2021 is $3,895 a month.
The most an individual who files a claim for Social Security retirement benefits in 2021 can receive per month is:
$3,895 for someone who files at age 70.
$3,148 for someone who files at full retirement age (currently 66 and 2 months)
$2,324 for someone who files at 62.
Full retirement age, or FRA, is the age when you are entitled to 100 percent of your Social Security benefits, which are determined by your lifetime earnings. If you were born between 1943 and 1954, your full retirement age was 66. If you were born in 1955, it is 66 and 2 months. For those born between 1956 and 1959, it gradually increases, and for those born in 1960 or later, it is 67.
It is important to know that:
Claiming benefits before full retirement age will lower your monthly payments;
You can increase your retirement benefits by waiting past your FRA to retire up to age 70.
To be eligible for the maximum benefit, your earnings must have equaled or exceeded Social Security’s maximum taxable income — the amount of your earnings on which you pay Social Security taxes — for at least 35 years of your working life. The maximum taxable income in 2021 is $142,800.
The maximum taxable earnings is the limit on the amount of your earnings that is taxed by Social Security. The maximum earnings that are taxed has changed over the years. If you’ve earned more than the maximum in any year, whether in one job or more than one, Social Security Administration only uses the maximum to calculate your benefits.
“Get rid of the excuses and get invested.” Fidelity Investment
Daniel Crosby, author of The Laws of Wealth, presents 10 rules of behavioral self-management.
Rule #1 – You Control What Matters Most. “The behavior gap measures the loss that the average investor incurs as a result of emotional responses to market conditions.” As an example, the author notes that the best performing mutual fund during the period 2000-2010 was CGM Focus, with an 18.2% annualized return; however the average investor in the fund had a negative return! The reason is that they tended to buy when the fund was soaring and sell in a panic when the price dipped. More on volatility later…
Rule #2 — You Cannot Do This Alone. “Vanguard estimated that the value added by working with a competent financial advisor is roughly 3% per year… The benefits of working with an advisor will be ‘lumpy’ and most concentrated during times of profound fear and greed… The best use of a financial advisor is as a behavioral coach rather than an asset manager.” Make sure your advisor is a fiduciary. “A fiduciary has a legal requirement to place his clients’ interest ahead of his own.”
Rule #3 – Trouble Is Opportunity. “The market feels most scary when it is actually most safe… Corrections and bear markets are a common part of any investment lifetime, they represent long-term buying opportunity and a systematic process is required to take advantage of them.” The author quotes Ben Carlson: “Markets don’t usually perform the best when they go from good to great. They actually show the best performance when things go from terrible to not-quite-so-terrible as before.”
To do this is by keeping some assets in cash a buy list of stocks that are great qualitly, have a strong balance sheet and a strong brand, but are expensive.
Rule #4 – If You’re Excited, It’s a Bad Idea. “Emotions are the enemy of good investment decisions.”
Rule #5 – You Are Not Special. “A belief in personal exceptionality causes us to ignore potential danger, take excessively concentrated stock positions and stray from areas of personal competence… An admission of our own mediocrity is what is required for investment excellence… This tendency to own success and outsource failure [known as fundamental attribution error] leads us to view all investment successes as personal skill, thereby robbing us of opportunities for learning as well as any sense of history. When your stocks go up, you credit your personal genius. When your stocks go down, you fault externalities. Meanwhile, you learn nothing.”
Rule #6 – Your Life Is the Best Benchmark. “As a human race, we are generally more interested in being better than other people than we are in doing well ourselves.” However, “measuring performance against personal needs rather than an index has been shown to keep us invested during periods of market volatility, enhance savings behavior and help us maintain a long-term focus.”
Rule #7 – Forecasting Is For Weathermen. “The research is unequivocal—forecasts don’t work. As a corollary, neither does investing based on these forecasts…. Scrupulously avoid conjecture about the future, rely on systems rather than biased human judgment and be diversified enough to show appropriate humility.”
Rule #8 – Excess Is Never Permanent. “We expect that if a business is well-run and profitable today this excellence will persist.” The author quotes James O’Shaughnessy: “‘The most ironclad rule I have been able to find studying masses of data on the stock market, both in the United States and developed foreign markets, is the idea of reversion to the mean.’ Contrary to the popular idea of bear markets being risky and bull markets being risk-free, the behavioral investor must concede that risk is actually created in periods of market euphoria and actualized in down markets.”
Rule #9 – Diversification Means Always Having to Say You’re Sorry. “You can take it to the bank that some of your assets will underperform every single year… The simple fact is that no one knows which asset classes will do well at any given time and diversification is the only logical response to such uncertainty… Broad diversification and rebalancing have been shown to add half a percentage point of performance per year, a number that can seem small until you realize how it is compounded over an investment lifetime.”
Rule #10 – Risk Is Not a Squiggly Line. “Wall Street is stuck in a faulty, short-sighted paradigm that views risk as a mathematical reduction [of volatility]… a flaw that can be profitably exploited by the long-term, behavioral investor who understands the real definition of risk… Volatility is the norm, not the exception, and it should be planned for and diversified against, but never run from… Let me say emphatically, there is no greater risk than overpaying for a stock, regardless of its larger desirability as a brand.”
One of the most interesting concepts in the book is that investing in an index is not as passive as we might assume. Crosby quotes Rob Arnott: “‘The process is subjective—not entirely rules based and certainly not formulaic. There are many who argue that the S&P 500 isn’t an index at all: It’s an actively managed portfolio selected by a committee—whose very membership is a closely guarded secret!—and has shown a stark growth bias throughout its recent history of additions and deletions… The capitalization-weighted portfolio overweights the overvalued stocks and underweights the undervalued stocks…’ In a very real sense, index investing locks in the exact opposite of what we ought to be doing and causes us to buy high and sell low… Buying a capitalization weighted index like the S&P 500 means that you would have held nearly 50% tech stocks in 2000 and nearly 40% financials in 2008.”
“Once we realize that passive indexes are not mined from the Earth, but rather assembled arbitrarily by committee, the most pertinent question is not if you are actively investing (you are) but how best to actively invest.”
“Behavioral risk is the potential for your actions to increase the probability of permanent loss of capital… Behavioral risk is a failure of self… Our own behavior poses at least as great a threat as business or market risks… We must design a process that is resistant to emotion, ego, bad information, misplaced attention and our natural tendency to be loss averse.”
Crosby presents rule-based behavioral investment, or RBI for short. “The myriad behavior traps to which we can fall prey can largely be mitigated through the simple but elegant process that is RBI. The process is easily remembered by the following four Cs:
Consistency – frees us from the pull of ego, emotion and loss aversion, while focusing our efforts on uniform execution.
Clarity – we prioritize evidence-based factors and are not pulled down the seductive path of worrying about the frightening but unlikely or the exciting but useless.
Courageousness – we automate the process of contrarianism: doing what the brain knows best but the heart and stomach have trouble accomplishing.
Conviction – helps us walk the line between hubris and fear by creating portfolios that are diverse enough to be humble and focused enough to offer a shot at long-term outperformance.”
“Rule-based investing is about making simple, systematic tweaks to your investment portfolio to try and get an extra percentage point or two that has a dramatic positive impact on managing risk and compounding your wealth over time… We know that what works are strategies that are diversified, low fee, low turnover and account for behavioral biases.”
“Just like a casino, you will stick to your discipline in all weather, realizing that if you tilt probability in your favor ever so slightly, you will be greatly rewarded in the end… Becoming a successful behavioral investor looks a great deal like being The House instead of The Drunken Vacationer.”
The author quotes Jason Zweig: “You will do a great disservice to yourselves… if you view behavioral finance mainly as a window onto the world. In truth, it is also a mirror that you must hold up to yourselves.”
Crosby, Daniel. The Laws of Wealth: Psychology and the Secret to Investing Success. Hampshire, Great Britain: Harriman House, 2016.
WAITING TO CLAIM SOCIAL SECURITY WILL MAXIMIZE YOUR LIFETIME BENEFIT
If you claim Social Security at age 62, rather than wait until your full retirement age (FRA), you can expect up to a 30% reduction in monthly benefits.
For every year you delay claiming Social Security past your FRA up to age 70, you get an 8% increase in your benefit. So, if you can afford it, waiting could be the better option.
Health status, longevity, and retirement lifestyle are 3 variables that can play a role in your decision when to claim your Social Security benefits.
You can start claiming Social Security benefits at 62 and it can be tempting to take the money and run as soon as you’re eligible. After all, you’ve been paying into the system for all of your working life, and you’re ready to receive your benefits.
But you will not receive 100% of your benefits unless you wait until your Full Retirement Age of 66 years and 10 months if you reach age 62 during calendar year 2021. And if you wait longer, like until age 70 years young, you can receive even more benefits.
If you start taking Social Security at age 62, rather than waiting until your full retirement age (FRA), you can expect up to a 30% reduction in monthly benefits with lesser reductions as you approach FRA, according to Fidelity Investments. FRA ranges from 66 to 67, depending on your date of birth. And your annual cost-of-living adjustment (COLA) is based on your benefit. So if you begin claiming Social Security at 62 and start with reduced benefits, your COLA-adjusted benefit will be lower too.
Wait to Claim
Health status, longevity, and retirement lifestyle are 3 key factors that can play a role in your decision when to claim your Social Security benefits. Unfortunately, you can not predict your future health status, but you can rely on the simple fact that if you claim early versus later, you will likely have lower benefits from Social Security to help fund your retirement over the next 20-30+ years.
By waiting until age 70 to claim your benefits, you could get the highest monthly benefit possible over your lifetime than if you start claiming at age 62.
And if you are married, you may be eligible to claim Social Security based on your spouse’s earnings. This may mean a significantly higher monthly payment for you if your spouse had a higher income than you during his or her prime earning years.
Basic Benefit Rules
After you reach age 62, for every year you postpone taking Social Security (up to age 70), you could receive up to 8% more in future monthly payments. Once you reach age 70, increases stop, so there is no benefit to waiting past age 70.
Members of a couple may also have the option of claiming benefits based on their own work record, or 50% of their spouse’s benefit. For couples with big differences in earnings, claiming the spousal benefit may be better than claiming your own.
Social Security payments are reliable and should generally adjust with inflation, thanks to cost-of-living increases. Because people are living longer these days, a higher stream of inflation-protected lifetime income can be very valuable.
Social Security can form the bedrock of your retirement cash flow and income plan. That’s because your benefits are inflation-protected and will last for the rest of your life. When making your choice, be sure to consider how long you may live, your financial capacity to defer benefits, and the impact it may have on you and your survivors.
