Retire Better: Never mind the Social Security increase, seniors are in trouble — here’s why

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You might have heard that Social Security checks are going up 2.8% next year, the biggest rise in seven years. That translates into an average benefit of $1,461 a month, up $39.

While welcome, it’s necessary to remember that the increase is tied to inflation. Higher payouts will simply enable retirees to keep up with the rising cost of living. It doesn’t mean that anyone’s standard of living will go up—as if an extra $1.28 a day will do much in the first place. Think of a treadmill: You’re not going anywhere.

In fact, retirees and those who are eyeing retirement risk going in a different direction: backward. A study by the Schwartz Center for Economic Policy Analysis at the New School finds that about 40% of middle-class Americans will live close to or in poverty by the time they reach age 65. “Golden years?” For millions, it’s doubtful.

Since more people retire at 62 than any other age (because that’s the earliest they can tap into Social Security), let’s use that as a benchmark.

If you’re an average, single middle income earner and retire at that age now, you’ll get $17,532 from Social Security next year. That’s well above what the federal government considers the official poverty level for a single person: $12,060.

But here’s the thing: the federal poverty thresholds are so absurdly low, that many economists double them to get a more realistic level. So that $12,060 that the government calls poverty? It should really be $24,120, says economics professor Teresa Ghilarducci, one of the study’s authors.

“We base it on what we call the level of ‘economic deprivation,’” she says. And when you double it, it’s clear that millions of older Americans could slide into poverty when they retire.

The same ratios could apply for couples if both worked. But one partner could also collect a mere “spousal benefit” that’s just 50% of the other person’s.

Read: Why retirees should feel very worried right now

All these numbers can be confusing. Let me give you the bottom line: you’re not going to get much from Uncle Sam, and remember, depending on a variety of factors, parts of that Social Security can be taxed. In the end, many retirees will wind up sending a portion of their income right back to the government.

This is where other sources of retirement income, like pensions and personal savings, play a big role. That is, they WOULD play a big role, if people had them. As we’ve mentioned before, 91% of workers in their 50s don’t have a pension, and nearly half—46%—don’t participate in a retirement plan at work—not an IRA or 401(k), nothing.

Read: Opinion: Like Hoover and Dubya, will Trump eat his words about the economy?

The absence of assets in these two critical categories places added stress on Social Security. In millions of cases, it may prove to be the biggest source of income that some retirees have. This is a huge problem. Social Security was never meant to be a principal source of income—but merely a supplement to pensions and personal savings.

Read: What you probably don’t know about Social Security

You’re probably aware that there’s a terrible Catch-22 here. But it bears repeating. If you’re anxious to grab into Social Security as soon as you can because you need the money, you can do so at 62. But your monthly checks will be smaller. If you can afford to wait a few years, you get more—a lot more. Here’s what the Social Security Administration says:

If you were born in 1960 your full retirement age is 67.

If you begin taking Social Security at age 62, you’ll get 70% of the monthly benefit—because you retired five years before your full retirement age.

If you begin taking Social Security at age 65, you’ll get 86.7% of the monthly benefit—because you retired two years before your full retirement age.

If you wait until age 67—the full retirement age—you’ll get 100% of the monthly benefit.

If you have a spouse, there’s another set of numbers to consider, which you can read here.

Since you don’t want to slide into poverty, like the Schwartz Center predicts for many people, which path is best of for you? Most financial advisers would urge you to keep working as long as you can. Squeeze every last nickel and every last benefit out of your employer, and leave at 67, when your Social Security has fully blossomed. Meanwhile—and sorry to be a Scrooge here—slash your living expenses and save as much as you can. And recognize this: your living standards might not be what you once dreamed of or assumed.

There’s also this wildcard: What happens if Social Security is slashed 21% come 2034, like the government has warned? Do you want a 21% cut of the smaller, age 62 Social Security check, or a 21% cut of the bigger age 67 check? There’s always a chance that Social Security could be propped up—if you have confidence that our politicians, who can’t agree in anything, can agree on a solution. Me, I don’t have that confidence,

So many complications, and you should discuss them with an experienced financial adviser. But this much is clear: Avoiding poverty is your goal. How will you do it?