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How much will Social Security replace? |
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By SAGHIR ASLAM, Columnist
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When determining how much income you’ll need after retirement, it is typically expressed as a percentage of your preretirement income. Thus, if you earn $75,000 per year and estimate you’ll need $70,000 after retirement, you’ll need 93 percent of your preretirement income. Rules of thumb estimating how much is needed range from 70 percent to more than 100 percent of pre-retirement income.
How much can you expect Social Security benefits to contribute? One study found that the median replacement rate is 37 percent for men and 52 percent for women. Since men have higher earnings levels than women and the system is progressive, their replacement rates are lower. The overall replacement rate is 42 percent, but that number varies significantly depending on income level. Individuals with the lowest fifth of earnings had a 72 percent replacement rate, while those with the highest fifth of earnings had a 31 percent replacement rate. When couples are considered, the median replacement rate is 56 percent when one spouse did not work and 42 percent when both spouses worked.
To find your personal replacement rate, check your estimated benefits in your annual Social Security Statement, which details three different benefit amounts — those at age 62, at full retirement age for Social Security purposes, and at age 70. Your annual benefits divided by your annual income equals your replacement rate. You might want to calculate the replacement rate for each of the three different benefit amounts. Then consider other sources of retirement income, including pension benefits and savings to find out how close you are to the amount you will need for retirement.
If your replacement rate is less than what you will need, consider delaying your Social Security benefits. Most people start benefits before age 65; with 74 percent of men and 78 percent of women starting benefits before age 65 in 2003. Approximately 59 percent of women and 53 percent of men started benefits at age 62, even though delaying benefits permanently increases Social Security benefits.
Married couples should consider this option carefully. Since women are often younger and live longer than their husbands, they will receive benefits for a longer period of time, with the amount of those benefits often dependent on the age their husbands start receiving benefits. While the husband is alive, the wife is entitled to 100 percent of her benefit based on her earnings or 50 percent of the husband’s benefit at full retirement age, whichever is larger. However, if the husband elects benefits before full retirement age, the wife’s benefit will be reduced by a higher percentage than the husband’s benefits were reduced. After the husband’s death, the wife receives 100 percent of his benefit if she is over full retirement age. If not, the wife receives between 71.5 percent and 100 percent of the husband’s benefit. Thus, the larger the husband’s benefit, the larger the wife’s benefit will be after his death.
Another study conducted by the Center for Retirement Research recommends that the husband delay Social Security benefits until at least age 66. For most couples, it was recommended that the husband start benefits at age 69, and the wife start benefits at age 62. When the couple is close in age and earnings, benefits for the husband should start between ages 66 and 68.
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