One of the most popular topics in financial services is Social Security. Open up your mailbox in certain neighborhoods and you can monthly (if not weekly) get an invite to a hotel ballroom or restaurant to learn about the little-known “secrets” of social security. All of this makes a lot of sense in an era where the system of social safety nets now nearing their 100th anniversary are showing signs of wear – social security is not what it once was, and deep down everybody seems to know it. What they don’t know is what to do about it.
Picture yourself in 1935. You are likely either a factory worker or a farmer (statistically speaking). If you are the latter, much of your social safety net lies in the land you own or have a long-term rental agreement for. You have a son who is going to farm that land for you and make sure that you keep food on your table. If you are a factory worker… not so much. The industrial revolution of 30 years back has created massive income opportunities within cities, but with those opportunities come fluctuations and risks, never before borne by the bulk of American citizens.
You also, due to a variety of factors, have a much shorter life expectancy. If you live past 61 you’ve really achieved something. Retirement (as we know it today) was a luxury of the uber-rich: people who—with fortunes acquired by blood line or business acumen—faded from work in their fifties to watch from corner offices as progeny and associates ran their financial affairs for them.
Enter the Social Security System. Passed into law in 1935, the benefit was designed be accessed at Full Retirement Age of 65. (Yes, you’ve done the math correctly, that’s 4 years AFTER you’re supposed to be dead.) And, at that time, there were 37 active workers for every retiree, so the government got the math pretty well figured out in their favor.
So, Mr. 1935 guy, how does retirement work for you? If you live longer than your peers and work until full retirement age, you probably take a couple years of benefits and maybe a small pension from your factory and live in relative stability until passing away much later than planned. Luxurious (if you don’t mind outdoor bathrooms.)
Today? A whole different story. Today there are 3 active workers for every person in retirement. Today the average life expectancy exceeds 75 years, so a person taking full retirement benefits may be on the program for a decade or more. Yes, the Full Retirement Age (FRA) of the Social Security System has crept up a few years, thanks to some Reagan Era legislation, but the issues remain the same.
Add to that fact that you are probably neither a factory worker nor a farmer. You don’t have a small pension, you’ve worked at a wide variety of jobs, and you’ve got money stashed in random 401(k)s, IRAs and other accounts with varying investment performance and benefits. Retirement today (for better or worse) is a self-made affair, not one primarily provided by government or your employer. A study in 2016 by DST systems notes that the average retiree (and who’s average?) will collect only 34% of their retirement income from social security, with 66% needing to come from other sources. And the earlier you take your benefit the riskier that proposition is.
So what’s a 2017 future retiree to do? Wait for the government to rebuild social security so it looks more like its 1935 origins? That’s about as likely as you remodeling your house and moving your toilet outside in honor of the “good old days”. No, today, retirement is about a matrix of informed decision-making. You must understand your social security options, and decide which is best for you and your family along-side all of your other investment and financial considerations. As we say often here at Trilogy: every dollar affects all the others. And that’s especially true of social security dollars.
So, don’t feel (In)Secure. There are ways to traverse these waters and we’re here to help. But make sure that you aren’t waiting for 1935 to come back in vogue… unless perhaps you’re thinking of getting into farming.
*Unless otherwise noted all statistical and historical data is taken from The Social Security Dilemma, www.stanford.edu.