This year, the maximum Social Security monthly check for someone retiring at 66 ("full retirement age") is $2,663, which is about $32,000 a year. To qualify, a senior must have paid the maximum Social Security tax for 35 years; thus, many clients will receive less—perhaps much less—from Social Security.
"In retirement planning, we provide hard number estimates for Social Security," says Tom Orecchio, principal and wealth manager at Modera Wealth Management in Westwood, N.J. "In most cases, Social Security is an added 'bonus' for clients. However, for other clients, Social Security is a more substantial part of their income, so it can impact their retirement savings and their asset allocation."
That is, if Joe and Sue Smith have projected Social Security income of $50,000 a year between them, and they desire $90,000 a year in retirement, there would be a $40,000 annual gap. With a 4% initial withdrawal rate, this couple could have a retirement goal of $1 million in savings. "In that situation," says Orecchio, "such a couple has the option of holding more in equities because the pension-like nature of Social Security allows them to be a bit more aggressive in their portfolio."
LESS CAN LEAD TO MORE
Mary McGrath, executive vice president and portfolio manager at Cozad Asset Management in Champaign, Ill., also believes in making sure realistic numbers are used for Social Security when planning for retirement.
"It's important for people to understand their 'net' Social Security benefit and not focus on the gross," she says. "Social Security typically will be reduced by Medicare premiums, and the benefits are taxable in most cases. These factors decrease the spendable amount someone might receive." After taking these issues into account, a client who plans to withdraw relatively little can be more aggressive in their asset allocation then someone who will be drawing 5% or more of their savings, McGrath concludes.
One of McGrath's single clients retired this year. This client would like to spend $45,000 a year and she'll receive about $25,000 from Social Security, so she'll need to take around $20,000 a year from her savings. "Her investments total $600,000," says McGrath, "so her distribution rate is 3.4%."
This client is single, with no dependents and no debt; she has long-term care insurance. "Her biggest risk in retirement is that she might outlive her investments," says McGrath, "but at a 3.4% withdrawal rate that is not likely to happen. She is comfortable with an allocation of 40% in fixed income and 60% in equities. If and when interest rates go up, we may consider moving some of the fixed-income portion of her portfolio to a lifetime annuity to give her more assurance of income that will not stop until her death."
Donald Jay Korn is a Financial Planning contributing writer in New York. He also writes regularly for On Wall Street.
This story is part of a 30-day series on Social Security and retirement income strategies.