By Mike DuBose with Blake DuBose
From 1946 to 1964, America’s birthrate soared, earning this time period its nickname: the Baby Boom. Now, these “babies” are all grown up. In fact, since 2011, about 10,000 Baby Boomers have turned 65 years old every day, according to the Pew Institute—a trend that will continue until 2030, when 18% of the American population will be 65 or older. Because most people leave the workforce sometime in their 60s, this means that huge numbers of Americans (75 million, according to US News and World Report) are on the cusp of retirement.
Many people fear that they have not adequately prepared for the retirement they want. Sixty-two percent of investors polled in a 2013 BlackRock, Inc. “Investor Pulse” survey were concerned about having enough money to live comfortably in retirement. Another 54% were worried about outliving their savings. Sadly, these fears are based on brutal reality. Many of those retiring in 2013 will live to 85 years old (or more), according to Social Security Administration data; yet, the Employee Benefit Research Institute’s 2012 Retirement Confidence Survey found that roughly half of all households have less than $25,000 in retirement savings outside their home or 401(k). Many of those with inadequate savings will end up in poverty. In fact, economist James Poterba of MIT, along with colleagues at Dartmouth and Harvard’s Kennedy School, estimated that 46% of Americans die with less than $10,000 in assets, many relying almost entirely on Social Security for sustenance.
In the course of my retirement planning, I realized just how complicated Social Security can be. In fact, we counted 81 different ways to obtain it! When you add Medicare to the mix, it’s even more baffling. It’s no wonder that 58% of workers interviewed in a 2013 Transamerica study had “little to no knowledge” about the Social Security benefits available to them during retirement.
Reflecting this confusion, many people who are nearing retirement believe that Social Security will be their primary source of income; whereas, it should actually be seen as supplementary revenue. Recalling the famous saying, “A bird in the hand is worth two in the bush,” others fear that Social Security funds will run out, so they start drawing early at a lower rate. (People have the option to start drawing Social Security at 62 years old, but if they are still at least partially employed, they may only earn $15,120 annually before the Social Security Administration begins reducing their benefits.) In fact, the Social Security Administration (or SSA) reports that nearly 45% of retirees begin drawing at 62 years old. As a result, many lose out on significant income that could be theirs if they had only waited a few years.
Because the amount of Social Security you receive increases by 8% each year, the longer you wait to draw Social Security after you turn 62, more money you can receive. For example, at 62, I will be eligible for $1,703 per month. If I wait until age 66, the amount grows to $2,345, and at 70, the monthly check will be $3,200. My spouse will be eligible to receive half the amount of my check, so if we delay drawing Social Security until I am 70 and she is 68, we will have a monthly Social Security income of $4,800! Using those figures, if I retire at 62 years old, I will receive $572,208 from retirement until death; at 66 years old, $787,920; and, at 70 years old, $1,075,200 (not including my spouse’s benefits). It appears that, for it to be fiscally worthwhile to wait to age 70, you will need to live until at least 77.
Choosing when to retire can be difficult, but here are some suggestions to help you approach the decision:
Eliminate debt: One thing is definite—you want to move into your retirement years debt-free. If you’re good at managing your money, you can still charge expenses to credit cards to earn rewards like free hotel rooms and airline tickets—just make sure to pay them off each month to avoid wasting money on interest.
As you approach retirement, avoid risky investments: Some people realize that they do not have adequate retirement savings late in life, go into “panic mode,” and invest in high-risk, high-yield investments in an attempt to make up for lost time. However, the period when you are nearing retirement is exactly when you need a conservative-to-moderate and diversified risk strategy. Whatever you do, don’t make financial matters worse by risking the little savings you have.
We know others who have purchased annuities that guarantee a certain amount of monthly income. Annuities are very complex and come in many different forms, so if you take this route, do your research. In some scenarios, you lose your investment when you die or if the company goes out of business, and we have heard horror stories about unethical people selling annuities that take advantage of the purchaser. If you don’t understand it, don’t buy it! Also, only buy annuities from secure companies with AA or AAA credit ratings.
Seek professional feedback: We advise hiring an unbiased, experienced certified financial planner to review your assets, income, expenses, and budget as you develop your retirement plan. Bob Bryant, CPA/PFS, CGMA of Raymond James Financial Services, Inc. in Irmo, SC is an excellent financial planner himself, and he suggests that individuals consult experienced Certified Financial Planners (CFPs) or Certified Public Accountants (CPAs)—who are dually certified as financial planners—for help with retirement planning. Both designations require holders to have bachelor’s degrees, take certain classes, and pass rigorous exams. CPAs tend to specialize on tax issues and CFPs on investing, although there is overlap. Typically, you should look for fee-based advisers rather than those who rely on commissions, as it is easier for commission-based advisers to be swayed by their own financial interests. Whoever you choose, it should be someone you can trust who has a range of services and knowledge at his or her disposal (like multiple certifications and/or access to a wide variety of retirement products). As my recently deceased friend George Tucker, who was also a financial planner, said, “You never want to hire a plumber with a single screwdriver in their toolbox!” Ask friends and colleagues for recommendations and review financial planners’ online presences before hiring them. Some finance professionals’ websites contain great retirement planning resources themselves. Neil Brown, CPA, CFP, who has written excellent financial columns for The State Newspaper, has some very helpful links and information on his website.
Develop a realistic retirement budget: Many individuals fail to adjust their spending habits when they enter retirement. You simply can’t continue to spend as you did when you had the income from a job! Determine what kind of post-retirement lifestyle you desire (within reason) and the money you will need to fund it. In developing your budget, monitor your bank and credit card statements for the past 1-2 years and note your typical monthly expenditures. Don’t forget miscellaneous cash expenses, which are hard to track—and can add up to 20% or more of a budget!
You not only want to factor in ongoing expenses and a little fun, but also follow the DuBose philosophy: “Hope for the best; plan for the worst!” Consider the unexpected possibilities that are not factored into your monthly budget: hospital stays, medical services, and prescriptions not covered by private insurance or Medicare; the death of your spouse and the resulting reduction in Social Security or other income; disasters that your homeowners’ or car insurance policies don’t cover; supplementary insurance; major appliance or car repairs and replacements; home upkeep; helping adult children with their finances; gifts for grandchildren; stock market crashes; divorce; losing a job or insurance; pet illnesses; roof or air conditioning repairs or replacements; nursing home care, etc. Above all, don’t expect to “live paycheck-to-paycheck”—one unexpected illness or major expense, and you’ll be in a financial tailspin!
Our excellent accountant, Frank Thomas, CPA of Kirkland, Thomas, Watson, and Dyches, recommends, "In preparing your retirement budget, factor in taxes that may be due on your Social Security income, along with other revenue such as withdrawals you are taking from your 401(k). Be sure to remember inflation and don’t overestimate the revenue your savings will generate. The best approach is to be conservative on revenue and liberal on expenses, and once you develop a retirement budget, stick to it.” Many financial planners say that you will probably need to withdraw about 4-5% of your savings and 401(k) each year to survive, in addition to drawing Social Security and other revenue. At 70½, the law requires you to make withdrawals from your IRA, SEP, 401(k), and other retirement accounts (except for Roth IRAs). The mandated withdrawal amount varies from roughly 4-9% annually, according to a 2013 Wall Street Journal article.
If you live longer than 20 years after you retire, your savings may run out. As a 2011 USA Today article noted, “Consider: if a man retires at age 65, it’s likely he’ll live at least another 21 years, according to the Institutional Retirement Income Council. There’s about a 10% chance he’ll need enough money to last 30 years or more. For women, the numbers are even scarier: About 25% will live to 93 or older, and 10% will live past 98. You could gamble that you won’t live that long. But if you’re wrong, you could find yourself impoverished at a time when you’re too old and frail to go back to work.” Thus, it makes good sense to estimate your lifespan and expenses liberally—and save aggressively.
Examine your family health history: When you apply for Social Security should be tied to how long you are likely to live. Reviewingclose relatives’ health is a good way to estimate your own life expectancy. While it’s not foolproof, considering the ages at which family members have died may give you some idea of how long you will live. (Keep in mind, though, that rapid advances in healthcare technology and differences in lifestyle factors like smoking mean that you could live longer than many of your recently deceased relatives.) Don’t rely too heavily on them, but some online calculators can provide you with a rough estimate of your lifespan based on your risk factors, lifestyle, and eating habits.
Maintaining access to medical insurance is critical to extending your life. Even if you retire early, Medicare will not kick in until you are 65, so plan wisely—you don’t want to find yourself without insurance OR Medicare. Another issue is that an increasing number of doctors do not accept Medicare because of the excessive paperwork and low returns, and the plans are only getting more complex. Ask your financial planner’s advice for help understanding Medicare, or use some of the free professional support services available online.
When estimating how long you will live, you may want to factor your zip code into the equation as well! In South Carolina, the average lifespan is 77 years old (the 42nd lowest in the US); Hawaii has the highest average lifespan at nearly 82 years old. According to the Centers for Disease Control and Prevention, heart disease is the leading cause of death in the United States. South Carolina, especially the Pee Dee region, has some of the highest rates of heart disease in the nation!
If your lifestyle and family history indicate that you will probably die earlier than most, you may choose to start drawing Social Security sooner rather than later. It is a personal choice, but one that should be based on careful study of many factors. Don’t rush into this important decision. Think carefully about your next move!
Ask questions: Several online tools can help you calculate your Social Security benefits and break-even age if you decide to delay your benefits, which may guide you on how and when to retire.
After you study and research your options, we suggest writing to the Social Security Administration and posing various detailed questions regarding how and when to draw your check. Keep in mind that once you select the age at which you retire with Social Security, the amount (plus inflation increases) is locked in for the remainder of your life. Also, if you retire early, your spouse will not be able to draw your full benefit upon your death. Provide identifying information such as your full legal name, Social Security number, date of birth, and address for both you and your spouse (with dual signatures on the letter to authorize SSA reps to respond). Their address is: Social Security Administration, Office of Earnings Operations, PO Box 33026, Baltimore, MD 21290-3026. We were very impressed with their written responses. You can also visit the nearest Social Security field office or call 1-800-772-1213. (Initially, we were not enthused about the hold times, but they have a nice service where you can leave your name and telephone number to keep your place in line. Then, when your turn is up, they will promptly return the call. Note: when calling the SSA, as with any automated system, keep saying “agent” and “general questions” to reach a human or get in line to be called back.) Overall, we prefer communicating with them via snail mail, as we obtained the best answers that way.
Other tips and strategies:
- Decisions you make about your Social Security may impact the amount your spouse draws if his or her amount depends on your work history. Therefore, involve your spouse in creating and discussing your Social Security plan.
- If the highest wage earner in a marriage begins drawing Social Security, the spouse can normally draw half at 66, even if he or she never worked outside the home.
- In situations where both spouses have generated enough credits to draw Social Security, the higher-earning spouse could draw Social Security and the other draw half of the higher earner’s check. Then, at 70 years old, spouses drawing the smaller check could switch to their own retirement check (based on work history) for a larger amount, depending on their work history and salary.
- Based on work history and credits, higher-earning spouses that continue to work may be able to suspend their Social Security at 66 years old while their spouse draws half of the higher earner’s Social Security. Then, when the higher-earning spouse reaches 70, he or she could begin drawing a larger amount without the spouse drawing an increase. When the higher earner dies, the living spouse would be able to draw the larger amount.
- If you were married at least ten years before divorcing, you may still be able to collect Social Security based on your former spouse’s work record—even if the spouse is no longer alive or has since remarried. This strategy can go back 2-3 spouses! If you are already drawing Social Security and this situation applies to you, you may be able amend your application for a larger amount. Contact the SSA for help.
- If you have the liquid assets, it may be wise to draw on your savings and/or 401(k) retirement accounts first, delaying Social Security for a larger check later, according to a 2012 Wall Street Journal column from Kelly Greene.
- If you applied for Social Security early but are still in good health and anticipate living longer than expected, you may be able to withdraw your application, repay the funds you have received from the SSA at no interest, and reapply later for a larger check. Under the current rules, you can only withdraw your application once and must do it within 12 months of placing the initial application.
- If you are still working at 65 years old but have inadequate or no health insurance, you may be able to suspend your Social Security so you can draw a higher amount later but still apply for Medicare. If you do this, however, you should also purchase a supplemental private policy to cover items that Medicare does not.
Predicted changes to the Social Security system
Social Security is always evolving, so it pays to keep up to date on any changes. In addition to the tips and Internet links we have provided, you should work with your financial planner, spouse, accountant, and the SSA to determine how to best plan your retirement.
Social Security is a politically-charged issue, and we don’t know exactly what the future holds. We do know that it will begin to take in less than it distributes in 2015. It is expected to be solvent until 2037, but even if it lasts that long, many younger people who are now paying into the system will receive little in return. Workers 50 and older should still expect to receive Social Security; those younger than 50 should not bank on receiving their full amount.
Real change is unlikely to come any time soon, according to retirement experts like Theodore Sarenski, CPA, CEO of Blue Ocean Strategic Capital. However, two smaller changes may occur sometime in the future, according to Sarenski: the full retirement age could gradually rise from 66 to 68 by 2050, and the amount for income that is subject to FICA or Social Security earnings could slowly increase from $106,800 to about $190,000. Also, according to some predictions, the Medicare eligibility age (currently 65) may be raised at some point to reduce Medicare spending, which is a major contributor to the federal deficit. In addition, the cost-of-living raises may be adjusted downwards.
The bottom line: No matter your age, don’t count on Social Security as your primary income. You should save as much as possible before you retire, work as long as you can, pay off all your debts, carefully study your options, and delay drawing Social Security to secure the largest check possible. Those who don’t obtain the savings they need before retiring will have to lower their expectations and standard of living. But those who plan smart will have extra savings available for travel and fun!
Life is a journey, and planning is critical. By “hoping for the best and planning for the worst,” you can enjoy a comfortable and fun retirement, although you may have to adjust your plans as you go along. If all else fails, pray! If God created the universe, He can surely help you through retirement.
The next installment of this series will focus on the psychology of retiring. If not planned correctly, retirement could bore you, kill you, cause a divorce, or result in depression!
About the Authors: Our corporate and personal purpose is to “create opportunities to improve lives” by sharing our knowledge, experience, success, research, and mistakes.
Blake DuBose graduated from Newberry College School of Business and is president of DuBose Web Group. View our published articles at www.duboseweb.com.
Mike DuBose has been in business since 1981, authored The Art of Building a Great Business, and is a field instructor with USC’s graduate school. He is the humble owner of three debt-free corporations, including Columbia Conference Center, Research Associates, and The Evaluation Group. Visit his nonprofit website www.mikedubose.com.
Katie Beck serves as Director of Communications for the DuBose family of companies. She graduated from the USC School of Journalism and Honors College.
© Copyright 2013 by Mike DuBose and Blake DuBose--All Rights Reserved. You have permission and we encourage you to forward the full article to friends or colleagues and/or distribute it as part of personal or professional use during the year 2013, providing that the authors are credited. However, no part of this article may be altered or published in any other manner without the written consent of the authors. If you would like written approval to post this information on an appropriate website or to publish this information, please contact Katie Beck at [email protected] and briefly explain how the article will be used and we will respond promptly. Shorter versions of some articles may be available.
