More than 40% of pre-retirees and 25% of millennials plan for Social Security to provide the bulk of their retirement income, according to a 2017 Gallup poll. If you're one of the millions counting on Social Security to take care of you, take a close look at the chart posted below.
Arguably the most important Social Security chart you'll ever see, it clearly illustrates exactly why you can't rely on Social Security benefits and highlights a common mistake retirees make that could cost them thousands over the course of their lives.
The most important Social Security chart you'll ever see
The chart below shows the average Social Security benefits paid by age of retiree in 2015, along with the maximum initial benefit a retiree would receive if the retiree claimed Social Security at different ages after earning the maximum taxable earnings, starting at age 22..
The chart also shows the monthly income necessary in a one-person household to earn enough to be at the federal poverty level in 2015.
Why is this chart so important? It reveals a number of common misconceptions about Social Security that can have a huge impact on your financial security in retirement.
Seniors relying solely on Social Security will struggle financially
The first reason this chart is important is that it shows how close to the federal poverty level you'll be if your only income comes from average Social Security benefits. Unfortunately, more than 2 in 10 married couples and 43% of single seniors rely on Social Security to provide 90% or more of their income. Because these seniors may be just above the poverty level, they may be ineligible for programs like food stamps, which could help them to survive with little monthly funds coming in.
On low fixed incomes, many will also struggle mightily to afford the costs of medical care, especially with mean healthcare expenditures totaling almost $6,000 annually for seniors 65 and over in 2016 -- around 39% to 47% of the average annual Social Security benefit for a single senior.
While those receiving the maximum benefit will fare better, this amount is available only to those who paid the maximum Social Security tax for at least 35 years. In 2017, you'd have had to earn $127,200 to pay the maximum Social Security tax. Only around 5% of all Americans earned this much. Most people, in other words, don't receive the maximum benefit.
Why does this matter? For many, Social Security is the only source of retirement income. Almost half of private-sector workers don't have a pension, and nearly 40% of them report that neither they nor their spouse have saved anything to fund retirement. For those who do have retirement savings, though, they're likely too low: The median amount saved among working families in the U.S. is just $5,000.
This chart should scare you into starting to save -- if you aren't saving already -- or increasing your savings. To help you save more for retirement, make sure you're taking advantage of retirement tax breaks, and consider automating retirement-account contributions.
Retirees don't understand when to claim benefits
There's a second reason why this chart is the most important Social Security chart you'll ever see. The chart shows how much higher your benefits will be if you wait to claim them. Unfortunately, most seniors don't really understand the impact of delaying benefits on their retirement income.
While you can claim benefits at 62, your full retirement age is not until much later. Full retirement age varies by birth year, but for those born in 1960 or later, full retirement age is 67.
When you retire 36 months or less before reaching full retirement age (FRA), benefits are reduced by 5/9 of a percent for each month before FRA. When you retire more than three years before full retirement age, benefits are further reduced by 5/12 of a percent per month.
For a senior with a full retirement age of 67, retiring at 62 would mean a 30% reduction in benefits. Waiting until 70, on the other hand, means a boost in benefits -- for those born after 1943, an 8% annual boost, or a jump of 2/3 of one percent, for each month of delayed benefits.
Unfortunately, less than a third of pre-retirees know their full retirement age, according to a Fidelity survey, and almost 40% of pre-retirees incorrectly believe their benefit will bump up at FRA if they take reduced benefits at 62. But if you take your benefits early, you'll be paid the reduced benefit for the rest of your life, unless you take drastic steps, like stopping benefits and potentially repaying what you already received.
This doesn't mean it never makes sense to claim benefits at 62. It's important to do the math and calculate how much you forego in benefits by delaying, and compare this to the amount of extra benefits you'll receive. Here's a simple example:
- If your benefit would have been $1,000 at a full retirement age of 67, but you claim benefits at 62, you'd receive $700 monthly, or $8,400 annually.
- If you wait until 70, your benefit would be $1,240 monthly, or $14,880 annually.
- By waiting to claim benefits for eight years, you'd have missed out on a total of $67,200 in benefits ($8,400*8).
- By delaying, your benefits are $6,480 per year higher ($14,880-$8,400).
- It would take you 10.3 years earning benefits at the higher rate to make up for missing out on eight years worth of benefits ($67,200 / $6,480).
If you expect to live more than 10.3 years after age 70 -- or to live to be over 80 -- it makes sense to delay if you can. Of course, not everyone is able to work longer, but as this important Social Security chart shows, those who delay receiving benefits could have substantially more income than their peers who claimed sooner.
This is actually another reason to save money: If you must retire early, you could live off your savings and delay taking Social Security benefits so you can spend the rest of your life with a higher monthly benefit than you'd have received if you were forced by financial circumstances to claim benefits early.
Start saving for retirement today
This simple chart is the most important Social Security chart you'll ever see because it emphasizes how vital it is to build a retirement nest egg. Fortunately, there are just a few simple steps to take if you want to retire rich.