How Does Social Security Factor Into Your Retirement Plan?

Financial planner Mark Balasa got a chuckle from the crowd when he made that statement at Morningstar.com's retirement income seminar in January 2011, no doubt because at least some audience members saw a bit of themselves in it. Because it provides an inflation-adjusted income stream that will last through a retiree's life, Social Security is an incredibly powerful benefit. At the same time, deficit worries have led some to question whether the program will continue on its current course: Proposals to reform Social Security have included raising the eligibility age, tweaking the inflation adjustment, or incorporating means-testing so that wealthy beneficiaries would receive a scaled-back benefit.

I recently asked Morningstar.com Discuss forum participants to share how Social Security had factored into their own retirement planning. Posting in the Investing During Retirement forum, I asked them if they were counting on a full benefit or were planning on scaled-back level of income from the program.

A robust conversation ensued, with clear divisions based on life stage. While retired or soon-to-retire posters generally had a moderate or high level of confidence they'd receive their full benefits, younger investors were more skeptical that the program would be viable by the time they got around to retiring. Some posters also shared what role Social Security had played in their retirement plans. It has been an essential component of some retirees' income streams, while others put their Social Security benefits in the category of "nice to have."

To read the complete thread or share the role of Social Security in your own retirement planning process, click here.

'I Think Social Security Benefits Are Fairly Sure'
A small contingent of posters who are retired or close to retiring have not factored Social Security benefits into their planning process. Chief K, while not expecting the imminent dissolution of Social Security, was a rare poster who's currently eligible for Social Security but is leaving open the possibility that his benefits could be curtailed in retirement. He wrote, "I expect Social Security benefit payments to continue in something close to the existing form. However, I have decided to discount the amount of estimated benefits for me (I'm over 65) by 15% because, I am just guessing about the future and I always prefer any financial surprises to be 'better' rather than for them to be 'worse.'"

More commonly, however, retirees who posted are fully expecting to receive their full benefits during their lifetimes.

Bubbygator was among the first retirees to weigh in, speaking for many when he said he's counting on his full benefit. He went on to argue that altering the system in a way that would affect current retirees' incomes wouldn't be politically viable. "I believe that if any changes are made to the Social Security system, such changes will not be retroactive to people who have already qualified and are currently receiving benefits. One reason I believe this is that the existing retiree base would raise hell politically against any retroactive bill."

Racqueteer concurred that those who are already taking benefits are unlikely to see their benefits cut. Thus, he wrote, "I took Social Security at 62, and I think by doing that, I made it more likely that my benefits will be grandfathered in regardless of what happens in the future."

FidlStix agreed. "For all the heat and light being generated over the demise of Social Security and Medicare, I think Social Security benefits are fairly sure for those of us 55 or older. I expect my wife and I will derive about 40% of our retirement expenses from our Social Security benefits." He went on to note that major market shocks are a bigger concern. "Although I'm looking to investment income for a big portion our retirement, I feel very vulnerable to Black Swan attacks." ["Black Swan" refers to Nicholas Taleb's book of the same name, which argued that market participants tend to underestimate the probability of extreme market events.] "However, federal programs like Social Security are relatively protected against Black Swans, if not attacks from Washington insiders seeking political advantage."

'Without It I Would Have to Pinch Pennies'
Retired posters also shared what role their Social Security benefits had played in their in-retirement plans. For Bobert42, and many others in the thread, it's been a big one. "My wife and I both collect Social Security. In 2011, Social Security contributed 44% of our income. In 2012 this will jump to 64%. So yes, Social Security is and will continue to be a big factor in our retirement. We would be in deep trouble if we had to depend on income from our investments given the poor performance over the past decade or so."

WOODJ is on the same page, writing that his household's Social Security benefits amounted to 55% of their spending last year. He concluded, "I need Social Security to maintain our standard of living."

JBP57's post illustrates what a lifesaver Social Security can be for those who have had to stop working earlier than they had hoped. "Social Security is the largest part of my yearly income. I started drawing at 65 and 10 months because I was out of work and had gotten used to eating on a regular basis. I continued to draw when I went back to work.