A Layman’s Look from Don: Streams of Retirement Income, Pt. 3

by Donald Whelpley
@ 2022 All rights reserved.

PART 3

– You have calculated your unique retirement needs.
– You have researched your Continuing Retirement Resources and subtracted those from your needs to determine how much you will need to rely on savings.  
Those are facts.  (I like facts).  Now we can begin to explore how to use those facts, and others, to our best advantage.  

The “experts” mostly talk about your pension, 401k and Social Security.  What they don’t tell you is that YOUR retirement plans will be much more secure if they are built on at least 6 “streams of income.”  Why so many?  The principal idea is that you should never put all your eggs in one basket.  There are risks and benefits to every retirement stream.  If your entire plan is focused in two or three streams, then your risk is increased.  I will deal with some problems with each stream as well as benefits.  

STREAMS OF RETIREMENT INCOME

Several retirement writers speak of the “3-legged stool” of retirement planning (pension, Social Security and 401k).  Pfft!!!  This kind of planning would be great if the ONLY thing a retiree had to worry about was having enough money to fund retirement.  But there are several other issues which the “3-legged stool” approach does not consider, but which YOU SHOULD consider:  
1) How to survive financially if one of you needs Medicaid assistance.  (major loss of acquired resources)
2) How to provide for your spouse if you were to pre-decease.  (loss of one person’s Social Security and pension)
3) How to provide for yourself if your spouse were to pre-decease.  (same)
4) How to leave a healthy inheritance for your heirs.  (keeping the government fox away from the henhouse)

The truth is that:  
a) There is almost a 50% probability that one or more spouse will need assistance from Medicaid.  
b) There is a high probability that at least one spouse will live to, or beyond, age 85.  
c) You will need a serious plan if you are going to leave an inheritance.  So, you need more “legs” on that retirement stool.  You should have 6 or more streams of income.  

So let’s jump into the various Streams of Retirement Income you may have…

Stream 1:  Social Security benefits.  
The government insisted you pay the taxes, so insist the government pay your benefits.

The 1st problem with Social Security (SS) is that it is controlled by politics.  There is constant talk of delaying or reducing benefits.  And, you should EXPECT that your benefit package will be impacted at some point.  These are not idle treats.  
The 2nd problem is that COLA (Cost of Living) increases DO NOT keep pace with inflation.  Perhaps you could afford a used car with your annual benefit at 62, but you should not expect to be able to purchase a similar car with your annual benefit at age 72.  
The 3rd problem is that if you don’t enjoy the benefits the government won’t gift them to your heirs.  The benefits you don’t receive are lost forever to your family.

The positive side of SS is that YOU decide when to start receiving it.  If you fully retire or work a few hours a week you may be able to take it at age 62.  Or you can continue to work full time and wait to receive your full benefit when you reach Full Retirement Age (FRA).  (See Stream 8 for more information).
Two things I can say about this…
1) If you are healthy and take SS at 62 you may live to regret that financial decision.  In a survey by the National Financial Retirement Institute and another by The 2019 MassMutual Social Security Pulse Check found that nearly 40% regretted taking the benefits at 62.  That percentage is too great to ignore.  This deserves a good deal of thought.  A study of longevity tells us that over 73% of 62 year old males (females have a higher percentage) will live to age 80. Those are pretty good odds…which tells us that, for most, it is not wise to take benefits at 62.  Even a delay of one year could net significant long-term results.  If you would have received $16,000/year at age 62, just waiting until age 63 to apply will give you about $100 MORE per month for the rest of your life.  That could buy several breakfasts at the local diner.  And who doesn’t enjoy an extra breakfast?
2) Conversely, even if you are quite healthy and wait until you turn 70 to begin receiving benefits there is a substantial probability that you will never receive the total amount of money you would have compared to taking the benefit earlier.  

I did a simple “life-probability” study for healthy males who have reached the age of 62.  Many people do not realize that the longer you live the greater the probability that you will live beyond the average lifespan.  This is incredibly important to financial planning.  When you arrive at age 62, you are in a “select” group of people who did not die prematurely.  Your life insurance company and the Social Security Administration already know this: https://www.ssa.gov/OACT/population/longevity.html.
I calculated MY “best” age range to enroll in Social Security benefits is between 63½ and 65½.  The benefit earnings compared with longevity probabilities are most in my favor in that range.  I strongly disagree with the many retirement articles suggesting that the best age is 70.  Plus, you have to consider when the extra income can bring you the most enjoyment and peace of mind.  This does not mean you should take the benefits when I would since there are several other factors to consider.

Your spouse’s SS benefits:
Each spouse has options.  He/she can take his/her own benefit any time after age 62, or tag onto the benefits of the other at Full Retirement Age.   Don’t assume this is unimportant.  Get the information so you can plan appropriately.  
The most important issue here is whose benefit is greater.  Regarding survivorship, if your benefit is greater and you took it at 62 instead of delaying, you are exposing your spouse to a significant reduction of income if you die first.  That has to go into the decision equation.

See Part 1 of A Layman’s Look from Don: Streams of Retirement Income
See Part 2 of A Layman’s Look from Don: Streams of Retirement Income

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