by Rick Kahler
At the heart of America’s overspending are two popular entitlement programs, Social Security and Medicare. Most Americans count on Social Security for a significant portion of their retirement income and on Medicare for all their retirement health care needs.
One question I’m often asked is, "Will Social Security be there for me when I retire?" That’s a fair concern when you consider the staggering size of our national debt, which is small compared to the "off balance sheet" liability represented by the unfunded obligations of Social Security and Medicare. Most lawmakers agree off-record that the only way these programs will continue to exist is if we make cuts in benefits and broadly raise income taxes on all taxpayers, not just the rich. Such a scenario probably includes a European-style national VAT (value added tax).
The good news is that when you take politics out of the equation, saving Social Security could be fairly simple. There are a number of easy fixes that can guarantee its solvency, such as extending the retirement age to 70 and increasing the Social Security tax. I have little worry that seniors currently receiving Social Security will see any reduction in benefits. For those not yet retired, my best guess is the program will "be there" in some shape or form.
To qualify for Social Security benefits, you need to have worked at least part-time for a cumulative total of at least 10 years. These don't need to be consecutive. There are a lot of myths about how the Social Security Administration computes your benefit. It is computed on your average lifetime earnings of the past 35 years, adjusted for inflation. While having a high salary the last few years of employment will help raise your average, it won’t increase it significantly.
In their current form, when compared to other similar immediate annuities, Social Security and Medicare are a great deal. They represent a complete security net of retirement, disability, and health insurance benefits that are indexed to inflation. The only little flaw in the formula is that the benefits are so good, we are having to borrow money to deliver them. Only time will tell if Congress increases taxes enough to retain the current benefits or whether we will see some decrease in benefits.
Currently, while Medicare benefits begin at age 65, the qualifying age for receiving full Social Security benefits is being gradually increased. It tops out at 67 for those born in 1960 or later. Some retirees, however, elect to start receiving reduced benefits (only 70% of the full amount) at age 62. The typical thought is that "a bird in hand is worth two in the bush" and that the present value of saving the five years of reduced benefits offsets waiting until 67 for the higher amount.
That reasoning is absolutely correct—if the person dies a premature death. There is no easy "rule of thumb" to apply to your specific situation. Generally speaking, even if you retire at age 62, if you are in good health and don’t have a genetic history of cancer or heart disease, you are probably best off waiting until 67 to take your Social Security.
Of course, if you are still working at age 62, it probably makes sense to wait until age 67 to take your benefit. Any earnings above the $14,160 limit will reduce your Social Security benefit.
You can estimate what your Social Security benefits will be at www.ssa.gov/estimator/. To receive a written copy of your earnings history and benefits estimate, go to www.ssa.gov/mystatement/. You can also visit a local Social Security office or call (800) SSA-1213.
Rick Kahler, Certified Financial Planner®, MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!