Under current law every year you delay claiming Social Security past the normal retirement age of 66 boosts your check by a hefty 8% when you finally do take your benefits. Yet Wisconsin financial planner Ty Bernicke finds most of his clients want to start Social Security as soon as they can, even at age 62, when their monthly check is barely half the benefit they'd get by waiting until 70. A main reason, he says: "They think it will be harder for the government to cut their benefits once they start getting them."
There are some good reasons for certain folks to take benefits at 62 (although it usually pays to wait). But the possibility that Washington politicians will be foolhardy enough to treat seniors of the same age differently based on when they took Social Security isn't one of them.
Still, Bernicke's clients are wise to worry about Washington. Actuaries predict Medicare will be insolvent by 2024 and Social Security will be able to pay only three-fourths of promised benefits come 2036. With the national debt now at $14.3 trillion, cuts in federal benefits for retirees seem unavoidable. So how can you prepare--in addition, that is, to working longer and saving more?
First, don't overreact, especially if you're within striking distance of what Social Security calls the normal retirement age--66 for those born in 1954 or earlier, rising to 67 for those born in 1960 or later. We'll define striking distance as age 55 or higher. "If you're 55, the probability that Social Security will change is close to zero," insists William G. Droms, a Georgetown University finance professor with a side practice in financial advice. Even the Republican plan to turn Medicare into a capped voucher program would leave those 55 and up in the old system.
So your basic benefits won't disappear. Still, trims are likely. One big possibility: a "technical" change that would shave the annual cost-of-living adjustment for Social Security benefits by 0.3% a year. That sounds small but, compounding over time, produces an 8.4% lower benefit by age 92. Since most traditional private pensions aren't inflation-protected, that means you should put a high priority on protecting other income from declining (in real terms) in later years. There's no perfect way to do this. But options include holding more in stock, buying deferred immediate annuities that start paying at later ages and withdrawing from assets at an initial 4.5% rate--a rate calculated to allow you to increase withdrawals for inflation without outliving your money (FORBES, May 23).
Prepare, too, for your medical expenses to be even higher than current estimates. The Employee Benefit Research Institute figures a couple retiring at age 65 in 2020 needs to have $265,000 saved to have a 50% chance of covering their premiums for Medicare and Medigap and drug co-pays--and that's if they have median drug bills. But that doesn't count the higher Medicare premiums already charged to singles with adjusted gross income above $85,000 and couples above $170,000.
More cost shifting, particularly to higher-income seniors, seems likely. That means the ability to control the recognition of income could prove valuable--a good argument for funding aftertax Roth IRAs and 401(k)s, which unlike pretax accounts don't force you to take taxable distributions beginning at age 70 1/2.
Higher retirement medical costs is also a reason to fund a health savings account if you're eligible for one. A 55-plus couple can put away as much as $7,150 a year pretax, and it can grow tax free for future medical expenses.
