SOCIAL SECURITY OFFSET

This is standard practice in many- if not most- companies that offer pension plans. And if not understood properly, it can have a major detrimental affect on your retirement. I will first note that there is nothing wrong or unethical about the practice save for the fact that it may not be effectively communicated to employees

As an employer, the company is responsible for paying half of your social security benefits. As such, they are "responsible" for half of the social security benefits you get when you retire. (Obviously one must take into account how many years you worked for a particular company, etc. but for the sake of this example, I'll simply assume it was your entire working career.) We shall also assume that the company will pay you a pension. They therefore will SUBTRACT part of your social security payments from your pension plan and give you the difference.

Assume you were to get $1,000 in a monthly pension plan and $600 in social security. Your first thought is $1,600 in retirement benefits. But the company has the right to subtract $300 from the pension- half of the social security- and now you get only $1,300.

As might be clear, many employees- as well, I submit, as the bulk of planners- will miss this computation and it can make a dramatic difference in your retirement.

Here are some numbers to make my point.

The $1,000 per month of anticipated pension ($12,000 annually) over a 20 year period (age 65 to 85) and a 3.5% inflation factor is effectively equivalent to a lump sum of $176,518 (the figure is relatively small since the pension is NOT increased by inflation).

On the other hand, $700 per month ($1,000 anticipated pension- $300 of social security) with the same formula is equivalent to a lump sum of $123,562. That's about $50,000 less than what you had planned for at retirement.

And for planning purposes, the difference can mean big changes in your proposed retirement budget (notice how the budget always impacts planning at every level?) and might mean you retire in a different location, buy a smaller house, not have the amenities you had hoped for, etc.

If you are unfamiliar with what your company is doing, contact your human resource department and request a copy of your plan benefits. Then adjust your retirement accordingly.

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