Longevity is complicating retirement in more ways than financial planners can count.
For one, longer lifespans are fundamentally changing the question of when to retire. A 65-year-old has an average life expectancy of 86, and a 65-year-old couple has a 64% chance that at least one partner will live beyond 90. That’s stretching retirement from the 15 or so years common just a generation ago, to nearly three decades today.
For another, the future of Social Security—the backbone of most seniors’ income—remains uncertain. The trust fund is currently projected to reach insolvency as early as 2033, which could cut benefits significantly unless Congress intervenes before then.
“I do think concerns about the long-term health of Social Security are causing more people to rethink the traditional ‘wait until 70’ advice,” says Elias Friedman, certified financial planner and founder at Kadima Wealth. “The decision has become much more personal and situation-specific than it used to be.”
Finally, there is the issue of rising costs. While inflation affects the whole country, it hits those on fixed incomes hardest. Even for retirees with fully paid off homes, rising property taxes, insurance premiums, and healthcare costs are creating unexpected financial pressure.
As Friedman explains, “Many retirees built plans assuming Social Security would cover a larger percentage of their living expenses than it realistically will.”
The gamble
One of the biggest questions facing retirees today is when to start claiming their Social Security benefits.
On one hand, waiting to claim until age 70 guarantees the max benefit (the exact amount of which is based on an individual’s earning history), but on the other hand is the looming threat of insolvency.
If it gets to that point, benefits would automatically be cut 24% across the board, according to the nonpartisan organization Committee for a Responsible Federal Budget. For a typical couple reaching retirement just after insolvency, that would mean a $18,400 cut in annual benefits.
“Social Security certainly has a funding problem,” says Evan Mills, financial analyst at Scholar Advising. “If you claim now, you’re basically making a bet that Congress does nothing about the underfunding problem.”
Embedded in that bet is also a hedge—yes, if you start claiming your benefit before 70 you’ll be accepting a lower monthly payment, but that also may be more than the nearly $19,000 you’d lose out on annually if the program goes insolvent.
The logic makes sense on the surface, but Mills says the success hinges on another wager you’re making whether or not you’re conscious of it.
“You’re also making a bet that you’re not going to live long enough to regret taking a smaller check if Congress does step in and fix the funding problem, which they have plenty of levers to pull,” he says.
And the math may also be working against you, according to George Dimov, CPA and founder of Dimov Tax.
He says he worked with a client who started receiving Social Security benefits at 62 with the intention to put the money into savings. But when she started taking money out of her IRA, the combined income triggered what Dimov calls a “tax torpedo” subjecting $0.85 of every dollar in benefits to her regular income tax.
“It takes a bigger bite out of your Social Security benefits than you would expect,” says Dimov.
Beware of scary headlines
That’s not to discount the very real predicament many retirees or those soon to retiree are facing.
Only 59% of Americans have a retirement savings plan, and even among those who do, they are only moderately confident that they will have enough money to fund their retirement, according to a Gallup poll released last year.
Against that backdrop, the push to cash in on retirement benefits while they’re guaranteed makes more sense. But Friedman, Dimov, and Mills all warn against rushing to judgment.
“I advise clients to be careful about making major Social Security decisions based purely on scary headlines,” says Friedman. “I still believe delaying benefits can make a lot of sense for healthy retirees who expect longevity, especially married couples where maximizing the higher earner’s benefit can help protect the surviving spouse down the road.”
Dimov agrees, arguing that the bigger threat is poor tax planning.
Mills, meanwhile, remains optimistic that Congress will act to save the program before benefits are cut.
“I mean, how many politicians running in upcoming elections, when asked about this, are going to say ‘Yeah, we’re going to cut Social Security benefits from a major demographic?’” he says. “It’s a lot more likely they’re going to raise taxes on higher earners or create another bracket, which they’ve done before.”
In times of uncertainty, flexibility is the best remedy
But retirees don’t have to be content waiting to see what happens as costs rise around them. Instead, Friedman recommends focusing on optimizing for flexibility.
“That might mean reducing future housing costs, delaying retirement by a year or two, increasing cash reserves, paying down debt or reconsidering spending assumptions before retirement actually begins,” he says.
Dimov also warns against making big moves that can unwittingly push you into a higher tax bracket and run up the cost of other benefits, like Medicare.
“If you get a mortgage or a home equity line of credit you don’t have to pay taxes on that money,” he says, although you do generally have to pay interest. But, he explains, “If you take the same amount of money out of your 401(k) retirement account it can push you into a higher tax bracket and make you pay more for your Medicare premium.”
But Mills is more cautious about tapping home equity, which he says should be a measure of last resort.
“And at that point you should be asking yourself, ‘Is this a home I can stay in for the long run, or is there a better option that won’t drain my investment accounts just trying to afford the house?’” he says.
If you’re in a situation where your cash flow can’t cover the costs of homeownership, it might be a smart move to downsize and capitalize on any equity you have. But he’s careful to note that downsizing has to be a downsize.
“I mean actually buying a less expensive house so you can put more money away for the long run,” he says.
It’s a lot to balance for anyone, and Mills offers one last piece of guiding advice.
“For those who are counting on these benefits, I would never collect early. Taking a permanent reduction in benefits is going to hurt you the most,” he says. “The biggest risk isn’t dying before you earn enough to make up for delaying, it’s outliving your portfolio.”
