Retirees Receiving a Public Pension may be Unprepared for Reduced Social Security Benefits

Retirement planning is serious business in this age of longevity. Understanding how Social Security and pensions affect one’s income stream in later life is just the beginning, but critical to enjoying the golden years ahead.

LAGUNA NIGUEL, CA – 05 July, 2016 – When a person reaches retirement, enjoying the golden years they envision for themselves generally requires a strategy that provides an income stream able to help weather inflation, market volatility, unexpected expenses and 20 to 30 more years of living.

Planning for retirement means building a financial foundation and factoring in what needs to be done to keep the plan in place. But pre-retirees and retirees have a lot of information to sort through in order to make sure their financial needs can be met in retirement.

Social Security is a valuable asset and should be the starting point for managing a retirement plan. Retirees use assets to produce income streams, and Social Security really functions the same way, in reverse. Social Security is an income stream but one doesn’t see the asset as a lump sum when you begin receiving distributions.

Pensions, on the other hand, are funded from a lump-sum asset owned by the individual. With Social Security, the asset is owned by the government, but the asset equivalent to the individual can be valued by figuring what kind of asset would be needed to replace the income stream Social Security provides over one’s life expectancy or lifetime. When a person tries to appraise their Social Security benefits as an asset, it can be impressively valuable.

The math will vary a little depending on what the individual’s rates are, and whether there is a survivor benefit in place. In some cases, the value of Social Security could be considerable for married couples—a hefty asset. The scenario may be somewhat different for retired federal workers.

According to the Social Security Administration, People who receive a pension from a federal, state or local government job may receive reduced Social Security benefits, as well as reduced spousal, widow’s or widower’s benefits, because they were exempt from the Social Security payroll tax during their working years.

According to Kevin Richards, an investment advisor and insurance professional with KNR Consulting & Wealth Management, Inc. in Laguna Niguel, California—who is not affiliated with the Social Security Administration or any other government agency—many government employees don’t realize that their Social Security benefits may be reduced until they apply.

“Retiring government workers receive their annual statement with a benefit number, but they have no idea they’re subject to an offset,” says Richards. “While some federal, state and local employees have paid into Social Security, others have not.”

Social Security calculates benefits by looking at the average monthly earnings for the years a person paid into the system. These benefits are intended to replace a percentage of the worker’s preretirement earnings. According to the Social Security Administration, lower-income workers get a larger percentage of their earnings replaced than higher-income workers.

According to the Social Security Administration, until the mid 1980s, the administration used a formula that treated government employees, who may have contributed into the system for only a few years, the same as low-wage workers. As a result, public employees received a disproportionately large Social Security benefit, in addition to their government pension.

In 1983, Congress ended this practice with a Windfall Elimination Provision (WEP), which does not apply to government pensioners who paid into the Social Security system for 30 years or longer. Additionally, the windfall provision does not apply to workers who receive a military pension or a private pension.

Like Social Security, WEP-reduced benefits could change based on the retiree’s age when he or she claims it. For example, based on information from the Social Security Administration, if a person had 20 years of covered earnings, and their full monthly benefit at 66 was $1,372, it would be reduced $372 by the windfall provision. But if they had claimed at 62, the earliest age allowed, their benefit would have been reduced by 25 percent to $750. For each year one delays claiming benefits past age 66, they receive an 8 percent delayed-retirement credit until they reach age 70.

Once an individual has sorted out their Social Security and pension benefits, they can establish a retirement plan. However, finances in retirement take on an entirely new perspective compared to the working years.

“Most retirees take a more conservative approach to their portfolio than they did before, since income stream becomes a more pressing focus,” Richards says. “Some key factors to keep in mind when planning an income strategy include inflation, market volatility and withdrawals.”

According to Richards, inflation can have a powerful impact over the course of 20 or 30 years. This is especially true in retirement, when one’s income may be fixed.

Even a relatively low inflation rate can significantly affect a retiree’s purchasing power. For example, using an inflation calculator demonstrates that, assuming a 2 percent inflation rate, $50,000 today will be worth only $30,477 in 25 years. Or, flipping this example, a purchase that costs $50,000 today would cost $82,030 in 25 years. This is why it is important to start planning early to help protect one’s future lifestyle.

Market declines can be unsettling for someone whose savings needs to last the rest of their life. However, having a portion of one’s assets in the market may be necessary for growth potential. The key is finding the right balance between assets that can provide steady and reliable income, and those that may be subject to loss.

Making that determination, as well as how much savings one can comfortably withdraw in retirement and remain confident that their money won’t run out, is important for the long-term well-being of their assets.

Planning ahead is always a good strategy for helping ensure a confident retirement.

All written content on this document is for information purposes only. Opinions expressed herein are solely those of KNR Consulting and Wealth Management, Inc. and our editorial staff. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your individual adviser prior to implementation. Fee-based investment advisory services are offered by KNR Consulting and Wealth Management, Inc. a Registered Investment Advisor in the State of California. KNR Consulting and Wealth Management, Inc. and KNR Consulting Group, Inc. is not affiliated with or endorsed by any government agency. Investment advisory services offered through KNR Consulting and Wealth Management, Inc. a Registered Investment Advisor in the state of California. Insurance products and services are offered through KNR Consulting Group, Inc., KNR Consulting and Wealth Management, Inc. and KNR Consulting Group, Inc. are affiliated companies.

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Company Name: KNR Consulting and Wealth Management
Contact Person: Kevin Richards, Investment Advisor Representative, Insurance
Phone: 949-218-3900
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