You’ve worked for decades, and are now looking forward to your golden years. Having a robust nest egg is critical to retirement planning. Think of retirement income like a 3-legged stool: your savings, your employer’s contribution (pension), and social security you receive. Certainly, your savings, often by way of IRA’s & 401(k)’s, is a key facet, but many people nowadays do not have a pension. So we all rely even more on social security than generations past. But what exactly is social security? What are the main points to know?
Social security is a retirement program run through the federal government. It is a ‘pay-as-you-go’ system for which about 170 million Americans pay and more than 70 million individuals receive benefits. It was created by President Roosevelt in 1935. The recipients are retirees, disabled individuals, families of those retired, and disabled or deceased people. Those working contribute to the system via payroll taxes or a 6.2% tax on wages up to about $140,000. How much money you paid-in through taxes during your working years largely determines your retirement benefits.
You are not going to get rich from social security. The average monthly benefit is about $1,500 per retiree or $18,000 per year. That is simply not nearly enough to live comfortably on. Your 3-legged stool must be propped-up mainly with your own savings from your working years. The typical retired household spends closer to $45,000 per year. Also, keep in mind that your social security can be taxed if your income is about $35,000 or higher for a couple.
Many people planning for retirement have questions regarding when the optimal age is to start receiving social security benefits. It can be a tricky question that requires proper planning, but in general, individuals are better off delaying benefits until age 70, though you can begin taking it at age 62. By delaying, it is like receiving an 8% annual rate of return versus taking it early. Some may say, “well, I may not live long enough to reap the benefits of delaying, so I’ll take it as early as possible.” Be careful. According to AARP, life expectancy at age 65 is 84 for men and 86 for women. There is of course the risk of living longer – and that is a risk! You don’t want to outlive your money. We at TFC are here to help you craft and execute the best retirement plan.
A common concern among citizens is around the solvency of the program – will social security be there when I retire – in 5 years, 10 years, 25 years? While we cannot say for certain, we know that social security is a VERY high priority for the federal government. Every politician goes on record saying he or she will protect the program for retirees. Still, since 10,000 baby boomers retire each day, there is a strain on the system to fulfill its obligations.
The trust fund that houses social security future payments currently has about $2.9 trillion – that seems like a lot, but the program is projected to run dry by 2035. Alarming as it sounds, keep in mind the government will likely adjust the program, and even take on more debt, to safeguard payments to retirees. The takeaway, though, is not to rely on social security; rather, focus on your own savings & investing strategy to ensure your retirement is indeed golden.
Here’s the point
- Social security is a pay-as-you-go system in which current workers are taxed in order to fund monthly payments to retirees and other qualifying individuals.
- The typical monthly benefit is not nearly enough to cover the average retiree’s spending, so each person must take responsibility to save & invest for retirement.
- Given the solvency outlook for the program, it is increasingly crucial for you to have a retirement planning strategy.
Action items
- TFC is here to help you devise that strategy. Sit down with us, and let’s review where you stand and create a game plan to get you on the right path toward a fruitful retirement.
- Save & invest. Social security is one leg of the stool, and while deciding when to begin receiving benefits is a piece of your strategy, it is more important than ever that you build savings & investments during your working years starting now.
- Consider increasing your 401(k) contribute rate or funding a Roth IRA – TFC is here to help you decide the best next step toward building your nest egg.