Dismissing Social Security Income Could Be A Big Mistake
For decades now, folks have been unsure whether they should include their projected Social Security benefit in their retirement income plan. According to a study by AARP, 65% of adults are not confident about the future of the Social Security program. This cynicism can be found with both older and younger Americans. As a result, the lifetime income stream that the Social Security benefit provides is being dismissed altogether and excluded from financial plans.
You have likely heard folks say, “I’m just not planning on it not being around when I retire.” This viewpoint is quite common today and could be problematic from a financial planning standpoint. This is what I’d like to address in this article.
Be sure to stick around to the end where I offer a FREE Social Security resource you can download today.
The Problem With The Social Security Program
It makes sense that so many folks are skeptical about the future of the program. We’ve been hearing doom and gloom news about the future insolvency and bankruptcy of the Social Security trust fund for quite some time. Additionally, financial news networks push fearmongering stories which often lead to the underlying facts of this issue getting buried in a bunch of noise. The facts are:
- Social Security is paying out more in benefits than it receives in tax revenue.
- The strain of baby boomers leaving the workforce has created a looming shortfall.
- If the shortfall isn’t corrected, reduced benefits will be required beginning around 2035.
Since Social Security impacts us all, it’s important that we stay informed about the reality of the program’s financial situation and the key role it plays in our financial lives. Its future impact on retirement planning should not be sold short. This applies to everyone, not just those who will rely heavily on their Social Security income to keep them from running out of money in retirement.
Guaranteed Income For Life
The employer pension plan isn’t an option for most Americans today as it has been in the past. You used to be able to serve a company for decades with their promise of pension income for the rest of your life. Nowadays, Social Security provides the only pension income that most Americans can expect to receive.
An income source which you cannot outlive is a tremendous asset in retirement.
Social Security is designed to do just that and to replace about 40% of a worker’s pre-retirement wages. That’s a considerable amount of income when you think about how your retirement is likely to last 30 years or more. Given the news and gossip on the future solvency of the program, altogether removing Social Security from your retirement income projections may feel like a safer approach. Yet this could lead to unnecessarily handicapping your financial plan even when you’re expecting to have sufficient assets aside from your Social Security benefit.
Less Than Ideal Options (If You Must)
If you insist on excluding the Social Security benefit from your financial plan, there could be a “gap” in your retirement income projection which will have to be made up in other ways.
Save more during your working years.
First, you will have to have the means to even do this in the first place. Many folks just cannot save anymore without sacrificing their current lifestyle. Second, over-saving for retirement, or any long-term goal, comes with its own opportunity cost. The option to use those dollars in a way which improves your life and brings you joy (before retirement) will be taken right off the table. This may not be an issue for some, but others could regret the opportunities and experiences they give up if this approach is used. Good and prudent financial planning includes examining how your money decisions affect both the present and the future.
Adopt a more aggressive posture with your investment portfolio.
The hope would be that a higher expected return rate for your invested assets will make up for the income gap your Social Security benefit would otherwise fill. Even if you are comfortable taking on extra risk with your portfolio, what are you really gaining by introducing more uncertainty into your life? Increasing your investment risk could just as likely not work out as expected. The stock and bond markets are under no obligation to produce an expected rate of return for you or anyone else.
What If Nothing Happens To Social Security?
So far, we’ve looked at:
- The problem with the Social Security program
- The importance of guaranteed income for life
- Less than ideal ways to look at making up for Social Security income
Let’s now turn to the uncertainty associated with future Social Security benefits.
As the current program stands, and if no changes are made, the Social Security Administration projects that there will only be enough funding available to pay about 75% of promised benefits beginning in 2035. While certainly a problem that needs to be addressed, 75% of promised benefits is substantially different than nothing! Don’t let this fact escape your attention. Even if nothing is done to fix the problem, you are only looking at an approximate 25% reduction in your projected benefit if you are retiring after 2035.
Fixing the system will require political willpower. Proposals have been put forth in Congress which could potentially increase benefits for both current and future retirees, as well as solidify the program for another 75 years. There’s no guarantee these proposals will ever get passed into law, but their existence underscores the difference between what the Social Security skeptics believe and what is likely to occur down the road.
Final Thoughts About Social Security Income
Despite the concern surrounding this issue, less than half of adults have confidence that they understand their projected Social Security benefit, and even fewer have received advice in this area from a financial professional. There is clearly a need for folks to engage with advisors who understand how to integrate this key benefit, as well as its myriad of claiming strategies, into an overall financial plan. It will be important for current and future retirees to have a solid strategy that prepares them for whatever the Social Security program may look like in the future.
A Helpful Resource For Social Security Benefits
These retirement benefits can be particularly complex, and many folks struggle with the decision about when and how to file. That is why I’m making available my checklist, “What Issues Should I Consider With My Social Security Retirement Benefits?”
This checklist covers key issues to consider:
- Determining whether you should file early or delay your benefits.
- Understanding the claiming options you have at your disposal.
- Coordinating your benefits with a spouse or ex-spouse.
- Understanding how your benefits may impact other tax-planning goals.
I would like to discuss this valuable resource with you, and to show you how planning for your Social Security benefit is a great step towards taking control of your finances.