Americans have grown understandably anxious about what it will take to retire. Beaten up since 2020 by COVID, political instability, the housing market, and inflation, people recently surveyed said they would need $1.25 million to be able to retire.
The problem though is most people are never going to be able to save this level of retirement funds and the reality for 50% of people is that they will end up overly reliant on Social Security to carry the lion’s share of their retirement.
Are people saving enough?
According to a recent Federal Reserve Survey of Consumer Finances, the average amount in U.S. retirement accounts is $65,000. For people ages 55-65 they have on average $135,000 and for people 35 and under they have saved on average $13,000.
These numbers are nowhere close to good enough for someone to hit the target of being able to save $1.25 million. Instead of focusing on an arbitrary number, people should target replacing 70% of their peak income for retirement.
If a person waits to start saving for retirement until age 35, they will need to save 24% of their income over the rest of their working years to hit the 70% mark, and if they wait until age 45, they will need to save almost half of their income to hit the same mark.
Can Americans rely on Social Security?
It is important to understand that the United States doesn’t have the same level of social safety nets found in many other western countries. Social Security has become the primary source of retirement income for the majority of elderly Americans providing $1.2 trillion in benefits to 70 million people in 2021.
Social Security provides at least 50% of retirement income in the United States and provides at least 90% of income for about a quarter of all seniors.
Also, once people turn 65 Medicare will cover their healthcare needs but not the very expensive eventuality of long-term care, and many people don’t realize that Medicare requires premium payments and ongoing out-of-pocket costs further eating into people’s retirement savings.
A recent GOBankingRates survey found that 20% of Americans plan to rely on Social Security to fund their entire retirement, and 31% say it will need to cover more than half of their retirement costs.
But Social Security should not be looked at as the sole source for anyone’s retirement income. It is more of a baseline supplement to a retiree’s savings, investments, and/or pension. The average monthly retirement benefit is about $1,600 per month which is just above the national poverty level of $1,452 for a two-person household.
Getting the most out of Social Security
With the limitations of Social Security, but its outsized roll in the majority of Americans’ retirements, here are some strategies to help people get the most out of their Social Security benefit:
People qualify for Social Security at age 62 – but the longer they wait to start collecting up to the age of 70 the more they will get. As of 2022, the monthly maximum benefit level for a person who starts collecting at full retirement age is $3,345, but if they wait to age 70, they would collect $4,194. If they started collecting earlier at age 62, however, they would only receive $2,364.
A person can continue to generate an income while on Social Security without owing any tax penalty against their benefit as long as it is not more than $19,500 for an individual in 2022. If a person is earning more than that, Social Security will tax between 50%-85% straight out of their benefit depending on the income level.
It is important to understand that when a person is on Medicare, the Part B premium is deducted automatically from their Social Security benefit.
Social Security considers an annual COLA increase, but it is discretionary and not a guarantee to happen every year. Fortunately, during this tumultuous period of inflation there was a large COLA increase in 2022 of 5.9% and an even larger one of 8.7% for 2023.
The spouse of a deceased or divorced partner can collect a higher amount based on their ex’s benefits if they are higher than their own.
If a person is going to re-marry, they can still collect based on their ex-spouse – but only if they wait to re-marry after reaching the age of 60.
In the case of divorce, an ex-spouse can collect up to 50% of the other’s benefit if they are 62 or older, were married at least 10 years, and are single.
When is the right time to retire
The reality for most people is that their retirement will be built on a foundation of savings and entitlements such as Social Security, Medicare, and possibly Medicaid during their long-term care years.
This makes retiring early, such as in a person’s fifties or early sixties, problematic because those are still critical income, saving and investing years. Having an additional ten or more years to financially prepare for retirement could be the critical difference between scraping by or being able to enjoy a fruitful retirement.
The more savings a person manages to put away in tax advantaged vehicles such as IRA’s and 401K’s, and the longer the funds can grow tax-deferred, the better off their retirement foundation will be.
Other important considerations
Other important considerations about the right retirement age include when to take Social Security and Medicare, when to start tapping into funds invested in IRA’s and 401k’s, and when a person could be a candidate for alternative funding vehicles such as reverse mortgages and life settlements.
The earliest a person can start taking Social Security is at age 62, but people should wait as long as possible up to age 70 so they can lock in their highest monthly payout.
Everyone who qualifies for Medicare begins at age 65, but it’s important to remember that if a person retires earlier and loses their healthcare coverage they will be responsible for finding a replacement until age 65 – and that can be quite expensive.
Unless disabled or receiving long-term care, veterans qualify for VA benefits at age 65. The youngest age people can start tapping into IRA’s and 401K’s without penalties is age 59 and ½ (unless they qualify for certain “emergency” exceptions), but by age 72 the account owner must start taking Required Minimum Distributions (RMD’s).
For people who want to take advantage of alternative funding strategies, age restrictions may apply such as reverse mortgages at age 62 or life settlements at age 65 (unless a person is diagnosed as having chronic or terminal health conditions).
The more advisors can do to help clients understand these realities for themselves or for loved ones, the better chance people will have to take advantage of time and resources that are on their side.
Chris Orestis, CSA President of Retirement Genius, is a nationally recognized financial, health/LTC, and retirement issues expert. He has over 25 years’ experience in the insurance and long-term care industries. Known as a political insider and senior issues advocate, In 2007 he founded Life Care Funding, in 2017 he founded the LifeCare Xchange, and in 2020 he founded Retirement Genius. He is author of the books Help on the Way and A Survival Guide to Aging. He has appeared in The New York Times, The Wall Street Journal, CNBC, and many other leading media outlets.