In our most recent blog post, we discussed the import role that Social Security benefits play in the retirement income plan of most Americans, and provided a framework for understanding the various types of benefits. While sometimes dismissed as inconsequential, Social Security benefits provide a critical source of guaranteed income for most retirees. To wit, Social Security benefits comprise over fifty percent of the retirement income for two-thirds of current retirees and, critically, allow many seniors to live independently. In this blog post, we review how Social Security benefits are taxed and provide guidance on how and when to claim benefits. We encourage readers to review our previous blog post, A Primer on Social Security Benefits, as it provides important information that will aid in your understanding of the strategies outlined below. You can find that blog entry by clicking here.
To begin, an understanding of Social Security retirement benefits requires reviewing a few common terms that are key to making informed claiming decisions.
The age at which we retire has traditionally been linked to cultural norms and external factors such as the availability of a company pension, health care and Social Security retirement benefits. Pensions were designed to incentivize long-service with a single employer while also establishing formulas that would provide reliable incentives for employees to eventually retire. While there has been a dramatic shift from a manufacturing economy to one based on the delivery of goods and services, the decision to retire based on attaining a set age remains stubbornly persistent. As the self-funded and self-managed retirement replaces traditional lifetime pensions, fresh thinking has emerged on how to manage the risk of outliving one’s assets. Rethinking retirement as a ratio of working years to leisure years is beginning to gain acceptance as a more thoughtful way of addressing this and other retirement risks.
Let’s face it, the financial services industry loves analytics. We produce mountains of data and delight in presenting it to clients in new and creative ways. Finance is, after all, a highly analytic field, so it is hardly surprising that we focus our time and energy on numbers. This is the paradigm that is often used to develop and deliver financial advice, but a growing body of evidence suggests that the financial decisions made by most individuals may have less to do with analytics and more to do with behavior and emotions. How do we as advisors strike the appropriate balance between analytics and emotions, and what can the field of behavioral finance teach us that may help our clients to make better financial decisions?
Last week, in it’s annual report, the PBGC announced a record deficit of $35.7 billion.
The Pension Benefit Guaranty Corporation (PBGC) is a United States Federal Agency that was created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect companies’ pension benefits. For companies whose pension plans are insured by the PBGC, the PBGC will pay employees a portion of the pension funds if the company goes bankrupt.
The PBGC’s deficit has been increasing annually over the past several years due to a variety of factors. Unless the government steps in, this will result in the PBGC going bankrupt.
As you review your own company’s retirement plan options (for example taking an annuity option versus a lump sum distribution), knowing the back-up plan is important. If the company cannot meet its payout obligation, and the PBGC is having its own financial challenges, what are you to do in order to protect your pension payouts?
Why does this matter for you? If you were to take an annuity option from your employer when you retire and the company were to go bust, what will the PBGC do for you?
- The PBGC does not guarantee every dollar owed to you from your company pension plan – there is an annual cap. For 2013, the maximum guaranteed about is $ $57,000/year (for people who begin receiving benefits at age 65).
- The PBGC is running a deficit that will eventually bankrupt it, voiding your pension guaranty.
- The time has come for people to start saving outside of their employer’s plans for their retirement.
There are some major misconceptions about what retirement is and how much money you need to put away to have a comfortable retirement.
- The typical American household will experience a 28% income shortfall in retirement?
- 4 out of 10 retirees do not have sufficient income to cover their monthly expenses.
It is time to take additional steps to prepare for your retirement. You should not solely rely on your company being able to pay your pension, nor the PBGC to pay you either.
Call us today to schedule a retirement savings assessment and discuss retirement planning and year-end planning opportunities to minimize taxes today so you can have a more secure future.
 In private defined benefit pension plans
 2012 Fidelity Retirement Savings Assessment