How to align retirement goals with Social Security benefits

How to align retirement goals with Social Security benefits


Social Security is arguably one of the most important programs to retired workers in the country—and for good reason. Social Security payouts account for more than half of all income earned by roughly 6 out of 10 retirees—despite the fact that the program was never designed to replace the majority of pre-retirement income [1]. It was designed as a safety net to keep seniors out of poverty, not to cover all of the expenses retirees face in their golden years.

The discrepancy between how Social Security benefits were designed and how they’re being utilized is causing stress among those still in the workforce, with many employees choosing to delay traditional timeframes for retirement in favor of working longer. What’s more, one third of employees who envision working to some extent in retirement report choosing to do so due to concerns that Social Security benefits will amount to less than expected [2].

So it’s clear that as a group, we need to do a better job of planning ahead for retirement. Balancing personal savings with Social Security benefits is paramount to realizing a financially secure, stress-free retirement. And what’s one of the biggest variables when it comes to making your retirement nest egg last?

Life expectancy.

What’s the connection between life expectancy and Social Security?

The amount of your individual Social Security benefit is determined by multiple variables, including earnings history, employment history, and the age you begin collecting payouts. Retirees can begin collecting Social Security benefits once they reach age 62, but there are certain advantages to waiting at least until full retirement age—and beyond. The longer retirees wait to begin collecting Social Security payouts (up to age 70), the larger the benefit amount will be. But how do you know if it makes sense to begin collecting payouts as soon as you’re eligible or if you should wait to maximize your benefits?

It all comes back to life expectancy. Although you likely don’t have a crystal ball, there are a variety of factors that can help you make an educated guess at what your own life expectancy looks like. Find out what at ages deceased family members passed away; this will give you a good starting point. If you have a family history of serious illnesses and premature death, planning for a more conservative life expectancy may be in your best interest. But if your family has a history of living well into their 90s, you’ll probably want to plan to on living a bit longer.

But how exactly does having a guestimate on life expectancy help us determine when to begin drawing from Social Security? We’ll break that down too.

Social Security benefits and life expectancy: finding the breakeven point

Let’s say two workers retire at the same time: age 62. They both have the same working history and earnings history, have $250,000 saved for retirement, and will incur $30,000 in yearly expenses in retirement. The only difference between our two retirees is life expectancy. Our first retiree expects to live until age 80, while our second retiree knows people in his family tend to live a long time and plans to live until age 90.

Because of Retiree 1’s shorter life expectancy, he decides to begin drawing Social Security benefits before reaching full retirement age – cutting his benefit down to $1,400 per month. Meanwhile, Retiree 2 decides to wait until his Social Security payout reaches its maximum benefit (at age 70) to begin collecting payouts. His monthly Social Security payout will equate to $2,480 – significantly higher than Retiree 1.

How does the discrepancy in claiming age between our two retirees affect the overall account balance of their personal retirement savings? Both started with $250,000 in personal savings, so let’s take a look at how Social Security affects the health of those savings.

Balancing Social Security benefits with personal retirement savings.png

Since Retiree 1 and Retiree 2 decided to retire at age 62, they will both immediately begin tapping into their personal savings to supplement their lifestyle. Retiree 1 is receiving a monthly Social Security payout beginning right at age 62, while Retiree 2 won’t receive any help for roughly 8 years—meaning he’ll need to rely on his personal savings to fund retirement until drawing on Social Security at age 70. As you can see, Retiree 2’s account balance depletes much more rapidly than Retiree 1, but thanks to a significantly larger monthly Social Security payout beginning at age 70, Retiree 2’s account actually lasts longer than Retiree 1’s.

Clearly, life expectancy plays a huge role in determining your Social Security collection strategy. Having a plan in place prior to reaching retirement age will help you know how—and when—it makes the most sense for you to begin tapping into your Social Security benefits. And this, ultimately, can help ease some of the retirement stress felt by today’s workforce due to poor planning.