Social Security is a service on which millions of Americans depend. Signed into law in 1935, Americans have taken advantage of this program for generations.
Unfortunately, the program is expected to become insolvent by 2034 unless corrective action is taken by Congress. While we can hope that Congress will indeed take action, there is currently no sign of that being the case.
Keep in mind that insolvency does not mean the program will no longer exist. But it does mean the program will no longer have the reserves that it once had, and payments will be reduced.
People who are young and have many years until retirement are at risk of receiving no benefits at all when they retire. This may seem scary, but there is plenty we can do to ensure we still have enough.
For some, this will not necessarily be new information but will reiterate the importance of the steps that will be detailed here.
Why is Social Security Running Out of Money?
As you can probably guess, there is not one simple reason Social Security is running out of money. However, there is one big reason: people are having fewer children.
When people have fewer children, it means an aging population. In turn, that means more people collecting Social Security and fewer paying into the program.
Plus, many Baby Boomers are at or very near retirement today. The result is that a large part of the population is starting to retire and collect Social Security benefits.
So, large numbers of people are retiring, people are living longer, and people are having fewer children. All of this is bad for Social Security.
Social Security and COVID-19
Previous projections have Social Security becoming insolvent by around 2035, but some new, more updated analyses say insolvency could be reached by 2030.
The main reason for this is the huge spike in unemployment due to the pandemic. The unemployment rate was as high as 14.7% during the pandemic; that number has since fallen but remains high.
And high unemployment is a doubl-edged sword for Social Security: fewer jobs mean more people who are eligible decide to retire earlier than planned, this collecting Social Security.
At the same time, fewer people working means fewer people paying into the program.
Again, the hope is that Congress will act before we have a crisis on our hands. But so far, little action has been taken, and no legislation has been passed.
Prioritize Tax-Advantaged Savings
The first thing we all should be doing to prepare for retirement is to put as much money as possible in tax-advantaged retirement accounts. That means putting money in an employer-sponsored plan or IRA.
When you consider tax savings plus how those savings will be compounded due to interest earned, it quickly becomes clear what a huge benefit it is to have this option.
Money in retirement accounts is usually taxed when deposited or when withdrawn, but the real benefit is that growth is not taxed. That means any interest you earn on these accounts is completely tax-free.
People often don’t realize the power of compounding interest and diligent saving. For instance, did you know that if you save $10,000 per year and earn 7% interest annually on average, you will have amassed $1 million after 30 years?
That’s quite impressive, especially when you consider only $300,000 of that is your own contributions. Put another way, 70% of your investment portfolio will be interest and just 30% will be money you contributed.
Depending on your expenses, $1 million may be enough to fund your retirement.
The 4% rule, which is a rule of thumb for retirement savings, says you can drawn down about 4% of your portfolio per year and never run out of money. With a $1 million portfolio, that means drawing down $40,000 per year.
While this is only a rule of thumb, it shows the power of investing when combined with the 30-year example above.
Consider Real Estate Investing
Real estate investing is not a must, but it can help you amass a greater amount of wealth and even retire sooner. That’s because real estate is a dependable investment that tends to be mostly unfazed by stock market volatility.
That’s because having a roof over your head is always a higher priority than buying stocks. Nearly everyone in the country lives in some form of housing.
Meanwhile, only 53% of families own stock.
Provided that you are making smart real estate decisions, rental properties can generate a five percent to eight percent return every year.
If you want to get serious about saving for retirement, real estate investing is something to consider.
Manage Your Retirement Investments
Properly managing your retirement investments is yet another important part of securing your retirement. That is especially true if Social Security provides less retirement income in the future.
Many employers offer some guidance around managing retirement investments, but it can still be intimidating.
You may have heard about robo-advisors which make investing a whole lot simpler. The problem is that they may support an IRA, but usually not a 401k or 403b.
The good news is that there are now robo-advisors like Blooom which are specifically intended for employer-sponsored retirement plans. All you have to do is fill out a questionnaire when you are first signing up, and the system does the rest.
You don’t even have to worry about managing your investments on an ongoing basis. The system does that for you, too.
With the future of Social Security in jeopardy, I highly recommend looking into Bloom if you need help with your retirement investments.
What Will We Do Without Social Security? Press On.
The future of Social Security is up in the air. Most of us certainly hope Congress will take action before insolvency is reached, but there is no guarantee that will happen.
In the meantime, we can take steps to be sure we are saving as much as possible. Social Security is certainly nice to have, but it is by no means an absolute must.
There are several steps we can take to protect ourselves. First and foremost is to maximize tax-advantaged accounts such as a 401k and/or IRA. You can even use a robo-advisor to manage it.
Then, you can consider other investments such as additional stocks or real estate. You may want to calculate your future retirement expenses to determine how much you’ll need per month.
Whatever you do, be sure to start saving now if you aren’t already doing so. And remember: you can never save too much!
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Image source: 401kcalculator.org