Politics aside, Social Security is a very popular program, and it plays a big part in our financial planning practice as a steady, inflation-adjusted income for most seniors.
From a planner’s perspective, Social Security benefits aren’t incredibly generous, but they provide a baseline defense against extreme poverty in old age–the program’s original intent.
However modest, a Social Security check would be expensive to replicate in the private market.
Consider the average monthly benefit of $2,071. To support a lifetime retirement benefit that size on your own could cost more than $350,000–far more than the average Social Security recipient pays into the system.
Most people get less than they could
Sixty-seven is now the age for full benefits, but because most people claim Social Security at 65 or before, they lock in lower monthly checks for themselves, their spouses, and their survivors.
Consider a woman we’ll call “Anna.” She earns a less-than-average salary of $60,000.
Her Social Security statement projects the following monthly benefits:
- Age 62: $1,569
- Age 65: $1,989
- Age 67: $2,324
- Age 70: $2,912
“Anna” can receive an above-average benefit on her below-average salary just by waiting to file for Social Security at her full retirement age.
And notice the $1,343 monthly difference between ages 62 and 70!
Clients often ask for help with the Social Security claiming decision. Many of our analyses show that if you expect to live into your late 70s or early 80s, it might pay to wait if you can afford to.
For a typical senior, Social Security isn’t a terrible deal. The retiree gets a benefit they can count on for the rest of their lives that would be very expensive–if not impossible–to fund themselves.
Typical Social Security benefits for a financial planning client
People who hire financial planners tend to have more wealth and higher incomes than those who do not hire financial planners. Both groups still face gaps between their pre-retirement salaries and what Social Security provides.
Our typical client’s Social Security check is around $3,000 at age 67, with couples receiving $4,500 to $5,500.
As above, it’s not bad given how much it would cost to replace a monthly income that size.
But an average client household may have a lifestyle that requires at least $9,000 to $10,000 per month to support.
Even if you enjoyed a large salary, you can only get so much Social Security. The maximum benefit for individuals who file for benefits at age 70 is currently $5,181.
For retirement, most high-earning households enjoy income from government or private pensions, rentals, business profits, or withdrawals from investment accounts. In most cases, it’s a combination of several of these.
Conclusion
Social Security was not designed for people to receive decades of benefits covering a middle-class lifestyle. Passed in 1935, these “old age” benefits kicked in at 65 when neither the average man nor the average woman lived that long. (The early claiming age of 62 was legislated in 1961.)
Now, more than 95 percent of Americans over 60 are expected to receive some type of Social Security benefit. While the cost to taxpayers is substantial, these stable monthly checks boost most recipients’ quality of life.
Today’s realities, though, are that people live longer, and government benefits remain modest. This requires many families to amass substantial supplemental savings and assets to keep the standard of living they enjoyed during their working years.
Interesting Reading:
A History of Social Security: https://www.ssa.gov/history/