Dear Dr. Don,
My wife and I both plan to begin collecting Social Security in 2012, when we will be 62 years old. This will make up approximately 45 percent of our retirement income. Can we count on Social Security being there or do we need to make other plans?
-- Mike Makeup
I can't speak with authority about the fiscal stability of the Social Security system over the time that you and your wife are collecting benefits in retirement. But future Social Security taxes cannot cover future scheduled benefits and the shortfall is estimated at about $11 trillion in today's dollars, according to Dr. Olivia Mitchell, head of the Pension Research Council at the Wharton School of Business.
Mitchell made the comments in an interview last year with For Our Grandchildren, an educational outreach project of the Social Security Administration.
Some financial planners are reducing benefit estimates to be on the conservative side in planning retirement income. I'm not in that camp, but it's something to consider. You say that Social Security benefits will comprise 45 percent of your retirement income. What will you do if that number is 30 percent?
I take my own approach to retirement planning. I like to look at how you can delay getting Social Security benefits until at least full retirement age. I also consider the advantages of waiting until age 70 to receive those benefits. You take a pretty stiff reduction in benefits when you elect to receive benefits at age 62. The longer you wait, the higher your monthly benefit, until benefits are capped at age 70.
The Bankrate feature "When to take Social Security" explains some of the issues surrounding when to take Social Security.
By delaying Social Security, not only do you increase the size of your monthly benefit, but you also increase the percentage of your monthly income in retirement indexed to inflation.
A recent USA Today article, "Have your retirement cake early and eat it too," describes how people who began collecting Social Security at 62 can later pay back the benefits they received from age 62 and then start collecting benefits at the rate for which they are eligible at that later date. Someone in this circumstance could start receiving benefits at age 62, repay the benefits at age 66 and then start collecting at the full retirement rate.
A different approach is to buy an immediate annuity with your retirement savings that provides retirement income until you elect to start receiving Social Security benefits. I can't recommend that you take on any of these strategies on a do-it-yourself basis. Instead, consult with a financial planner and/or a tax adviser.
My best recommendation is that you look past the probabilities of reduced Social Security benefits and look toward managing your retirement income while figuring our how more of that income can be indexed to inflation.