Social Security payments offer a combination of advantages no other income source can offer retirees, a recent report from the Stanford Center on Longevity points out.
This means it’s even more important for retirees to think through their strategy for claiming Social Security benefits.
The report found that for “virtually all” workers and retirees with less than $1 million in savings, Social Security will comprise at least 50 percent and as much as 85 percent — if not more — of their retirement income.
The exact percentage of retirement income that Social Security generates for such retirees boils down to whether “they optimize the value of their Social Security benefits through their claiming strategy,” as the report puts it.
The advantages of Social Security
Retirement income faces risks. Many workers and retirees worry about outliving their retirement savings, for example. Other risks include the shrinking of savings due to inflation or taxes.
Social Security is largely immune to most such risks, however. The Stanford Center on Longevity points out that the pros of Social Security as a source of retirement income include that it’s:
- A lifelong payment, helping address longevity risk.
- Subject to regular increases, helping address inflation risk.
- Partly or fully exempt from federal income tax, helping address taxation risk.
- Not subject to financial-market risk, helping address investment risk.
- Paid automatically, helping address the risks of fraud and cognitive decline
The center continues:
“No other method of generating retirement income includes all these desirable features, so Social Security benefits represent a unique, valuable resource. This is one reason it’s important for middle-income retirees to optimize the value of their Social Security benefits.”
Perhaps the only type of risk that Social Security income might face is political risk. In other words, there’s a risk that benefits could be reduced after Social Security trust funds’ reserves are depleted, unless Congress addresses funding issues before that happens.
That’s not projected to happen for about 18 years, however, according to the latest annual report on Social Security and Medicare trust funds. The particular trust fund that pays retirement and survivors benefits, called the Old-Age and Survivors Insurance (OASI) Trust Fund, is currently flush enough to pay those benefits in full until 2035.
The importance of Social Security claiming strategies
Perhaps the best way to maximize the amount of your Social Security payments is to delay claiming benefits.
You can claim your Social Security benefits as early as age 62. But for every year that you put this off, until as late as age 70, you increase the amount of your benefit payments. We detail this in:
- “14 Ways to Maximize Your Social Security Checks“
- “Ask Stacy: Do I Really Need to Wait Until Age 70 to Collect Social Security?“
The Stanford Center on Longevity report even suggests that some retirees use their own savings to help them delay claiming Social Security benefits, likening this claiming strategy to buying an annuity:
“Risk-averse retirees who would otherwise consider purchasing low-performing annuities and fixed-income investments should consider first using their savings to enable delaying the start of Social Security benefits. The increase in Social Security benefits that is achieved by delaying benefits can be viewed as ‘purchasing an annuity from Social Security’ at a very favorable rate.”
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