Over the past 2 months (see archives Back9Pro.com) we’ve discussed the WHO and the WHAT, this month we’ll delve into the WHY Social Security is such an important aspect of Retirement Income Planning. In 2023 the average Social Security check was $1,657 for an individual and a couple’s average was $2,753 per month. On average most of my client’s Social Security checks or projected checks would be approximately $3,700 for an individual and $5,300 per month for a couple. Which makes sense, since almost 100% of my clients are referrals from CPA’s, Financial Advisors and client acquaintances who tend to be more affluent than the average American. Being more affluent also allows them to integrate Social Security benefits with other assets accumulated during their working years.
CHALLENGES
Higher income also means in most cases higher expenses, increased flexibility and additional complexity. I read an article the other day titled the 7 Challenges of Retirement Planning;
- Knowledge of how Retirement works and its risks
- Retirement date is usually sooner than expected
- Mindset adjustments between Accumulation Phase to Distribution Phase
- How much can I spend? What’s a safe withdrawal rate?
- Failure is not an absolute
- Never 1 right way
- Making adjustments are normal and required
What I still find interesting is that the financial community is still solidly entrenched in what I call an AUM (Assets Under Management) mentality. Since 2000 I have dedicated myself and message to an AUM (Assets Under Withdraw) mentality, which is how I stumble upon Social Security consulting. What I found is that very few people understand the nuances and complexities of Social Security, thus here I am!
Where’s My Pension?
It wasn’t that long ago where the vast majority of American’s worked for a company that had a traditional pension that paid a monthly check for life, when the worker retired. The early 80’s saw a tidal wave of change as the vast majority of companies switched from Defined Benefits Plans to Defined Contribution Plans, like the 401k. The main reason for the switch, was the companies not wanting the liability of having to issue checks to retired employees for years / decades to come! According to the Federal Reserve the number of traditional pensions has decreased from 35% in the 90’s to approximately 15% today. The median monthly pension check in 2022 was $883 per month!
Personal Responsibility – Good News / Bad News
The Good News is that with a Defined Contribution Plan you get to manage the money upon retirement, take out as much as you want and pass it on to your heirs upon your demise. The Bad News is that you must accept Personal Responsibility not to, excuse the term screw it up thus running the risk of running out of money before your run out of time! It’s fair to say that the vast majority of American’s would prefer a guaranteed monthly check for life upon retirement, but good luck finding companies that still offer them especially to new employees.
Social Security
That brings us back to Social Security which I consider a Pension, that gives the individual the ability to choose when to start, thus being able to access a greater monthly check by deferring until age 70 if appropriate. To receive a check that has an annual COLA which has averaged 2.6% since the 70’s when implemented. There are also spousal benefits depending upon whether your spouse worked and has their own record or didn’t work, thus qualifying for spousal benefits. There is the added benefit that the spouse inherits whatever your check was at time of death if greater than their own.
Bar Napkin Approach
I had an old boss back in the 80’s who told me on several occasions “Every presentation you make, you should be able to do it on a bar napkin! If you can’t stay in the bar until you can!” No truer words were ever spoken and I’ve attempted to follow this sage advice over the past 40 years. We live in a very complex world, with a gargantuan amount of information, both real and fake, but a dearth of wisdom! What I would do and have done personally is used the attached worksheet to determine how best to structure my retirement savings and expenses
Gotta – Wanna – Nice to Have Worksheet
- GOTTA – what do you absolutely have to have every month to cover your essential expenses? Here you would use Pensions, Social Security and possible annuities to make up any short falls in covering GOTTA have expenses (food, clothing, shelter, insurance, etc.)
- WANNA – what would you like, but don’t necessarily have to have (trips, vacations, country clubs, etc.). In this category I would allocate my stocks, bonds, mutual funds, real estate, etc. Since these investments don’t necessarily always go up and they tend to be more volatile I would allocate them accordingly. In layman’s terms in Good Years I’d go to Europe, in Bad Years I’d go to Galveston (no offense to Galveston), but what I’m really doing is cutting back if necessary. You’ve done this your entire life whether you know it or not.
- NICE TO HAVE – here are things I’d like to do if I can afford to. In this category I’d be gifts or spending on kids, grandkids, bequest to charities, etc.
Gatta, Wanna, and Nice to Have Worksheet
Conclusion
If you like this approach, by all means use it, if not there are hundreds of other ideas, articles and software platforms available. My main objective is to ingrate Social Security benefits into the overall plan. Almost 50% of all American’s over age 55 have ZERO dollars saved for retirement, thus its imperative even if you’re a millionaire to maximize your Social Security benefits for you and your spouse. Next month we’ll discuss the WHEN to claim.
Have a great month!
