Fitting Social Security into your retirement income strategy

Have you given much thought to collecting Social Security? The answer probably depends on how old you are — but whatever your age, you’ll want to consider the best way of incorporating Social Security benefits into your retirement income strategy.

Of course, if you have several decades to go until you retire, you might be wondering if Social Security will even be there for you at all. The basic issue is that the Social Security system is experiencing a sharply declining worker-to-beneficiary ratio. In plain English, this means that fewer workers are contributing to Social Security while the huge baby boom generation is retiring and taking money out. Still, Social Security has enough money to pay full retirement benefits to every eligible American until 2038, according to the Congressional Budget Office. After that point, benefits would have to be reduced unless changes are made to the Social Security system.

And several changes have indeed been proposed. Given that we do have nearly 25 years until benefit cuts may need to be made, it seems reasonable that some type of solution could be reached to put Social Security back on solid ground.

In any case, when thinking about your retirement income, you need to focus on those things that you can control — such as when to start taking Social Security and how you can supplement your Social Security benefits

Depending on when you were born, your “full” retirement age, as far as collecting Social Security benefits, is likely either 66 or 67. You can start getting your checks as early as 62, but if you do, your monthly payments could be reduced by as much as 30% — and this reduction is permanent. Consequently, if you can support your lifestyle from other sources of income — such as earnings from employment and withdrawals from your IRA and 401(k) — you may want to postpone taking Social Security until you reach your full retirement age. In fact, you can get even bigger monthly checks if you delay taking your benefits beyond your full retirement age, although your payments will “max out” once you reach 70. Keep in mind, though, that other factors, such as your anticipated longevity, should also enter into your calculations in considering when to take Social Security.

As mentioned above, your retirement income may also include withdrawals from retirement accounts, such as an IRA and a 401(k), along with other investments, such as a fixed annuity. And these other accounts are quite important, because Social Security provides, on average, only about 40% of retirement income for the average 65-year-old today. Consequently, in the years and decades before you retire, contribute as much as you can possibly afford to these other accounts. Given the advances in medical care and the greater awareness of healthy lifestyles, people are living longer than ever — which means you could spend two, or even three, decades in retirement. To enjoy those years fully, you’ll need adequate income.

By planning ahead, you can determine how best to fit Social Security into your retirement income strategy. Every move you make to help “secure” your retirement can pay off for you in the long run.

Doug Drost is a certified financial planner for Edward Jones, 2262 Reno Highway.