Making the most of Social Security

Maximizing your benefit can help you enjoy the retirement you've always envisioned

10 Dec 2019

Saving for the retirement you want often goes beyond your investments: It also includes all the other financial resources at your disposal, both now and into retirement. One of those resources is Social Security. While you likely won’t need to rely on Social Security as a source of income, Social Security benefits can be worth more than you might expect.

Come January 2020, nearly 70 million Americans will see a 1.6% increase in their Social Security and Supplemental Security Income (SSI) benefits. Known as the Cost-of-Living Adjustment (COLA), this increase aims to counter inflation, helping millions of Americans maintain their standard of living. While the annual COLA doesn’t provide blanket inflation protection, it’s just one of the reasons why Social Security deserves a closer look in your overall retirement strategy.

Below are a few more.

Key takeaways

  • Come January 2020, nearly 70 million Americans will see a 1.6% increase in their Social Security and Supplemental Security Income (SSI) benefits.
  • When incorporated into an overall investment strategy, Social Security can help investors mitigate some of the most challenging risks retirees face, such as longevity risk and sequence risk.
  • Delaying your Social Security benefit can translate into a significant increase in monthly income.

Stable income

Social Security is a benefit that provides stable inflation-adjusted income for life.

The amount of your Social Security benefit is derived from your average monthly income over your highest 35 years of earnings. There are many other factors that go into this calculation but that is just where it starts. Once the calculation is complete, the result is your Primary Insurance Amount (PIA)—the amount you would receive if you begin receiving benefits at your full retirement age.

Your full retirement age (FRA) depends on the year you were born, but it is typically age 66 or 67. You can claim your benefit as early as age 62 and as late as age 70. While benefits claimed prior to your FRA will be reduced, benefits will increase every month they are delayed after your FRA. Once you claim your benefit you’ll start receiving your calculated Social Security income every month for the rest of your life.

While the stable income is a nice boon for many, some retirees aren’t maximizing its potential over the long term. According to a study from the Journal of Pension Economics & Finance, over 50% of retirees have enough money in investments and savings to delay claiming their Social Security benefits for two years.

Despite this, many are claiming the benefits early—before they reach retirement age—which can lead to a reduced monthly benefit for life.

Some inflation protection

Social Security’s COLA is calculated by taking the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for July, August and September of each year, and comparing it to the three-month average during the same timeframe of the previous year.

While the exact formula can seem a bit convoluted, Social Security’s COLA does provide some inflation protection. That’s important given that inflation risk is one of the key factors retirees need to prepare for and manage in their investment portfolios. However, you shouldn’t rely on a rise in benefits, such as 2020’s 1.6% COLA, to dramatically improve your spending power.

As UBS Total Wealth Strategist Ainsley Carbone notes: “Social Security’s COLA does a reasonable job of tracking economy-wide inflation; however, most retirees will find that it does not keep pace with the inflation of their own personal expenditures.”

It’s also important to note that an increase in benefits based on Social Security’s COLA is not always guaranteed. In situations where the CPI-W does not increase year over year, it’s possible to see no increase at all.

A hedge against longevity risk

While you have planned diligently for the lifestyle you want in retirement, you should be aware of changes in spending patterns and the risk of the unexpected as you age—and be ready for them.

Retirees typically spend more in a few key areas, according to Carbone. “Relative to working households, retiree households tend to spend a higher percentage of their consumption on housing and medical care,” she explains. Overspending can create a significant risk to the health of your retirement portfolio, meaning it will be increasingly difficult for you to stretch your nest egg over the remainder of your life.

It’s also critical to remember that inflation risk can impact purchasing power. In fact, Carbone highlights inflation risk as “one of the core long-term risks” faced by retirees.

Social Security, as part of your overall longevity strategy, can act as a buffer and help mitigate longevity risk—the risk of outliving your retirement assets. While excessive spending can deplete other assets, this stream of income is guaranteed, so you don’t have to be concerned with making it last for your lifetime. Think of your Social Security as you would a bond in your investment portfolio: It works in conjunction with other investment assets as a substitute for fixed income, and essentially enables a family to take more risk with their liquid investment assets than they otherwise could. And by providing guaranteed income, Social Security has the potential to alleviate sequence risk by allowing an investor to not touch her risk assets at bear market prices, thus avoiding locked-in losses.

Maximizing your Social Security benefit

If you’re approaching or have just entered retirement, there’s still time to get the most out of your Social Security benefit.

You aren’t required to file for your Social Security benefit right when you retire. Take a look at your current investment portfolio and determine how long you can defer your Social Security claim. Delaying your Social Security benefit, even by just a few years, can translate into a significant increase in monthly income. If you can delay until age 70, you can maximize your monthly benefit for the remainder of your retirement. Given that more and more Americans are living to age 100, the difference could be substantial.

Smart planning along with an understanding of the best ways to maximize your Social Security potential can not only keep you on track for your dream retirement, but also hedge against unexpected expenses that might appear along the way.

Understanding these benefits can help you make the most of your retirement planning. After all, you’ve spent your entire working life paying into Social Security, so why not use it as part of your financial portfolio to enjoy the retirement you’ve always envisioned?


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