Social Security component important, but only part of plan

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Published: May 19,2008

Americans are living longer, and that means they need more savings to live comfortably in retirement. Unfortunately, far too many people — particularly women who traditionally earn less, build less retirement savings and live longer — aren’t adequately prepared.

“The latest issue of the Journal for the Mississippi Deferred Compensation Plan and Trust states the poverty rate for elderly women is approximately twice that of elderly men,” said Dr. Marianne Hill, senior economist with the Institutions for Higher Learning. “Two-thirds of all women over age 65 have no pension other than Social Security. Certainly one’s standard of living can fall if one depends for most of one’s income on Social Security.”

Beyond the basics

Hill said additional retirement income can be a necessity for the elderly with high prescription costs or health-related expenses. Just as importantly, if a retiree wishes to enjoy travel, hobbies and entertainment, he or she must have sufficient retirement savings and pensions beyond the basics that can be provided by Social Security.

Women are at a disadvantage with the Society Security system because it pays benefits based on an average of income. Women are more likely to spend years doing uncompensated care for children and the elderly.

“Social Security benefits are computed based on lifetime earnings,” said Barrie Carpenter, public affairs specialist for the Jackson office of the Social Security Administration. “The earnings are indexed to account for changes in average wages since the year the earnings were received. Social Security calculates the average indexed monthly earnings during the 35 years in which an individual earned the most. A formula is then applied to these earnings to arrive at the amount of the basic benefit, or primary insurance amount. A more detailed explanation can be found at www.socialsecurity.gov.”

People can decide to retire at age 62 or later. Retiring earlier reduces the amount of monthly payments received. Carpenter said the Social Security Administration doesn’t give advice about whether to start drawing benefits earlier or later, but it does encourage people to do financial planning for a secure retirement that includes sources of income other than just Social Security.

“Social Security has a variety of online services that are being used in increasing numbers,” Carpenter said. “The online Benefits Planners contains a Retirement Planner, Disability Planner and Survivors Planner. The Retirement Planner allows individuals to combine their estimate of future Social Security benefits with estimates of income from pensions and savings to determine if they are saving enough for a comfortable retirement. It contains an Earnings Limit Calculator that lets workers compute the effect of earnings on their Social Security retirement benefit if they continue to work and receive benefits prior to their full retirement age. More than four million individuals used the online Benefit Planner in 2007.”

Carpenter also advises people to pay close attention to their annual statements received from the Social Security Administration to make sure the figures are correct.

For anyone born before 1937, the full age to get retirement benefits in 65. After 1938, the age can be from 65 and two months to 67 years of age for 1960 or later for full benefits. An individual can start drawing retirement benefits at age 62, but this will cause a permanent reduction of benefits.

Wait while you can

Most experts advise waiting as long as possible before starting to draw Social Security benefits, said Dr. Pamela Smith, president of the Mississippi Council on Economic Education at Millsaps College.

Some might argue that since men have a shorter average lifespan, they might want to start drawing benefits earlier than women. But Smith said a man who takes good care of his health might expect greater longevity and want the higher benefits that come from starting to draw benefits later.

Other factors that should be considered are how long you want for work, how much you have saved for retirement and how much will be needed for medical care.

Smith said it is data indicates 30% of Americans have not saved anything for retirement. She believes more needs to be done to provide children with a comprehensive financial education so they understand the benefit of actions like saving for retirement.

“Every child deserves to know how he/she can succeed in our free enterprise system, and the best way to learn, if parents do not know, is through teachers who have the curriculum that is proven to reach students,” Smith said.

When to start drawing benefits is always a difficult decision, said Nancy Lottridge Anderson, CFA, a financial advisor and president of New Perspectives Inc. in Ridgeland.

Considering life expectancies

“This is morbid, but first look at life expectancies,” Anderson said. “I tell women to look at how long their mothers lived. Men should look to their dad’s longevity for some clue on their own life span. Of course, this is just a starting point. Also consider any current health issues. We don’t know the future, but if you expect to live longer than around 80, delay drawing Social Security, if possible.”

For some people, they have no choice. They don’t have enough of a nest egg and must begin drawing as soon as possible. But if you have other accounts you can draw from, do so.

“You’ll draw them down quickly at first, but will be able to cut back when you start Social Security,” she said.

Make sure that you will be getting what you deserve.

“Look at those annual statements,” Anderson advises. “If you have not received one lately, you can apply online at www.ssa.gov. Keep your latest statement in a file. When you consider what you’ll need in retirement, start with an idea of monthly income needs. Factor in Social Security payments, pension payments, etc. The gap that is left will have to be produced by your retirement investments.

“Most Americans are not preparing appropriately for retirement. Most want to keep up their current standards of living. This means starting early with savings and increasing your savings each year to build a nest egg. Use retirement calculators to figure out how much will be needed need and how much should be saved.”

Plan and prepare — now

Scot Thigpen with EFP Inc. Jackson, a financial advisory company, agrees the most Americans aren’t prepared for retirement.

“A survey conducted in January 2008 by the Employee Benefit Research Institute showed that 49% of workers surveyed reported total savings and investments of less than $50,000,” Thigpen said. “Additionally, 22% of workers and 28% of retirees reported no savings of any kind. These numbers are startling statistics for people nearing or already in retirement.

“In addition to inadequate retirement savings, many people are not prepared should something unforeseen occur (disability, death, etc). People should address their disability, life and long-term care insurance needs and should make sure their wills and beneficiary designations are in place and up to date. Many financial services firms can assist clients with these issues.”

Every individual’s situation is different, and thus there is no simple answer to questions like the best age to start drawing Social Security. Thigpen said factors to consider are life expectancy, salary history, current income, savings and marital status.

It is imperative to educate yourself about how Social Security benefits work through the resources on the Social Security website or through other literature, and\or by seeking guidance from a financial services professional to assist in analyzing the factors related to this decision.

Thigpen said any financial statement received, including Social Security statements, should serve as an opportunity to review your overall financial situation or a specific facet of your situation.

“Updated analyses are always the best way for determining whether or not your plans are on the right path or if adjustments need to be made,” Thigpen said. “Many online websites offer tools to assist in the analysis. Realizing that most individuals have a finite tolerance for reviewing financial matters, one need not make personal review a continuous exercise, but it should be a consistent exercise.”

He advises that Social Security should be only one leg of the classic three-legged retirement stool that also includes pensions and personal savings and investments.

Contact MBJ contributing writer Becky Gillette at 4becky@cox.net.

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