Social Security is the Basis of Your Retirement Plan: Four Things You Should Know

Dan Galli, CFP® and Karen Van Voorhis, CFP® |

ONE: Social Security isn’t a retirement plan; it’s longevity insurance. While we’re working, a portion of each paycheck is withheld and paid into Social Security to ensure that when we retire, we will receive at least a basic income stream. One of the most common fears is running out of money in retirement. By itself, Social Security income won’t be enough to live on, but it will pay some of the bills. Because benefits are inflation-adjusted annually, Social Security retirement benefits retain their buying power for as long as you live. You might draw down your other assets, but you can’t outlive that monthly Social Security payment.

TWO: The decision when to start collecting Social Security – as early as age 62, at Full Retirement Age (FRA – often age 67), or delayed until age 70 – depends on individual circumstances. Beware of any blanket advice to always take it early, or to always wait until 70. Some people need the benefit early as they are no longer working and need to pay their bills. Others would do better to delay the start of benefits in order to receive a larger monthly check. Calculating the “breakpoint” age is a futile exercise, given that no one knows exactly when they are going to die. 

THREE: If you choose to start benefits after your FRA, you can ask to receive the prior six months of payments in a one-time lump sum, in exchange for a slightly lower ongoing monthly benefit. For some people, this strategy could be useful if having the lump sum payment is more valuable than a higher ongoing benefit.

FOUR: We’ve all heard about how Social Security is on track to run out of funds in 2033. However, that doesn’t mean that any of our monthly payments will stop. If you look at a recent paycheck, you’ll see that 7.65% of your pay was withheld for Social Security; your employer contributes an additional 7.65%, for a total of 15.3%. By 2033, all that’s been collected won’t cover what’s owed, and monthly checks could be reduced by 25% to cover everyone who is eligible to receive benefits. This isn’t good, but it doesn’t mean payments will stop altogether. Worth noting that back in 1983, Social Security was similarly close to the brink, but Congress acted to keep the program on track for the following 50 years. We are hopeful that Congress will again do the same, keeping the program funded for at least another 50.