An almost perfect retirement income source

Did you know that Social Security benefits meet more retirement planning needs than most other ways of generating retirement income? That's one of the many insightful conclusions from a recent study by the Stanford Center on Longevity (SCL) and Society of Actuaries (SOA).

The SCL/SOA report demonstrates that Social Security has the following significant advantages:

  • It helps maximize the amount of retirement income a retiree can expect through a thoughtful optimization strategy.
  • It helps minimize a retiree's taxes by excluding part or all of Social Security income from taxation.
  • It protects against most common retirement risks, including longevity, inflation, investment, death of a spouse (through the survivor's benefit), cognitive decline and mistakes, and fraud.
  • It's simple to implement, with no transaction costs.

No other retirement income generator has this beneficial combination of features. That's why it makes sense for workers to maximize Social Security's essential value, usually by delaying the start of benefits for the primary wage-earner up to age 70. The optimal strategy for a married couple often depends on their specific circumstances. So it may be desirable to use commonly available software or to consult a financial adviser who specializes in Social Security optimization to determine the best strategy for you and your spouse.

The SCL/SOA study shows that for many middle-income retirees, Social Security benefits will represent 50 percent to 66 percent of their total retirement income if they start Social Security at age 65, and from 75 percent to more than 85 percent of their total retirement income if they optimize Social Security by delaying until age 70.

As a result, if Social Security benefits represent 80 percent of a retiree's total retirement income portfolio, then at least that same percentage of the total portfolio will enjoy the advantages listed above. In this case, Social Security may be the only annuity income that many middle-income retirees will need, given its dominance of their total retirement income sources.

Pessimists might point out that Social Security is subject to political risk because lawmakers can change the amount of benefits paid to current retirees or older workers. When deciding on a Social Security claiming strategy, older workers must weigh this risk against Social Security's desirable features, including the possibility of a permanently increased lifetime retirement income that protects against inflation.

Another worry to consider is the likelihood that politicians will make significant benefit reductions for existing retirees and current workers who are close to retirement, although this is more of a long shot based on historical evidence. So far, politicians have shown an extreme reluctance for widespread Social Security cuts for people close to or already in retirement.

Given that Social Security provides the biggest portion of income for a typical middle-income worker, it reduces their stress of finding the "perfect" retirement income generator when deploying their savings in retirement. Instead, older workers and retirees can choose simple, low-cost retirement income generators and feel good that they haven't missed out on a better solution.

Bottom line: Optimizing Social Security benefits should be the foundation of most workers' retirement income plans. 

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.