In the pension and Social Security law infancy of the 1930s, normal retirement was age 67 and life expectancy was age 62. It simply wasn’t expected that most were ever going to collect on either. 

With the advancement of modern medicine, life expectancy has been extended closer to age 84. Yet corporate America has a pension system that would allow the employees the ability to retire as early as age 55, with an unreduced pension, based on an 85-point system (combination of age and years of service). 

Today, with extended life expectancy and an early retirement feature, the actual years spent in retirement has been extended well beyond what pension actuaries were prepared for. Traditional defined benefit pension plans guarantee a retiree an income for life. If married, it is possible to guarantee an income for the lives of both spouses. Over time, this has become a crippling financial obligation for corporate America. With the approval of the IRS and ERISA, corporate America decided to start unwinding traditional defined benefit pension plans and convert them to cash balance plans. They were obligated to use a certain formula tied to current interest rates and an actuarial life expectancy. It is somewhat counterintuitive that a rising interest rate environment would actually lower a potential lump sum pension payout. The reason the direction interest rates moving have an inverse effect on lump sum pension values lies within how the conversion calculation is done. First, the original traditional pension benefit obligation is calculated based on the employees earned credits. This results in an amount the employee is to receive monthly. Then, that monthly income amount is converted into a lump sum present value of what the total future payout would be over the participants lifetime. The participant’s lifetime is determined by actuarial life tables. 

For example, if you’re trying to calculate for an income replacement, the higher the interest rate the lower the actual lump sum needed. So if I need $5,000 per year of income and can earn 5% on my money, I need $100,000 invested. If I could earn 8% on my money I only need approximately $62,500 invested to replace that same $5,000 of income. The higher the interest rate at the time of retirement the lower the lump sum. The US government has been raising interest rates in an attempt to slow inflation. 

All this is quite confusing and complex. Most people just want to retire worry free, but today they feel as though they are required to become pension actuaries and investment professionals before doing so. It is fair to say most are just trying to make their best informed retirement decision. This is where it becomes invaluable to seek the advice of a trained professional. These types of decisions are typically irreversible and will impact you for life. 

Please reach out to one of our financial advisors before trying to make this life-altering decision on your own. We are here for you and your friends and co-workers. Let us help!

The most common question I hear regarding social security is simply, “When should I take it?” To find a blanket answer would be like trying to answer the question, “What car should I buy?” The answer will always be “it depends.” What is your commute? How large is your family? Should you consider electric? Do you haul heavy items regularly? Simply put, one cannot recommend a car without more information. Answering when to take Social security is no different, it depends. 

Below are some items to consider when speaking with your financial professional. 

Earned Income: How long do you plan to earn income through wages and when is your full retirement age? If you earn income through wages or a business, it can affect your social security amount if you have taken benefits prior to your full social security retirement age. Benefits are withheld after a specified amount, and your benefits are then recalculated after full retirement age. 

Cashflow: What is your cashflow picture now, after retirement, and after starting social security? Everyone may have different resources to consider, and income is taxed in various ways. A retiree may have substantial passive income from real estate or farm cash rent that meets current living expenses. As a result, delaying social security may be a wise decision because additional cashflow is not necessary. Understanding your cashflow picture and integrating all financial resources can help make the social security picture clearer.  

Pension: Do you have a pension that interacts with social security? A social security component often exists and corresponds with traditional pension plans. It must be considered when deciding which pension option is right for you.  

Wages: Who is the higher wage earner for a married couple? Is an ex-spouse to be considered? Because social security rules depend on marriage status, spouses and ex-spouses must be considered. For example, if one spouse passes then the widow will receive the higher benefit of the two.  If delaying social security to increase the benefit is the decision, it may make sense to apply the strategy only to the higher wage earner knowing that the higher benefit will carry forward should one spouse pass prematurely.

These are just a few examples to consider in making your decision. Many other factors may exist for your situation, but a comprehensive understanding of your entire financial picture will help guide you to the right decision. 

Reach out to your financial advisor to review your situation and don’t forget to join us on Tuesday, October 25, for an Education Session on Social Security at SBC Wealth Management. RSVP today