social security

What If We Can’t Depend on Social Security?

January 29, 2021 By Susan Paige Leave a Comment

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.

If you own your own property, it can be an excellent source of income. There were over 43 million rental homes in 2017; New York City alone has over 5 million renters.

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!

For more great saving advice articles, read these:

At What Age Should You Start Drawing Social Security?

How Are Social Security Benefits Calculated?

Social Security Accounts for 66% Of Retirees Primary Income

What Women Need To Know About Social Security

Image source: 401kcalculator.org

How Are Social Security Benefits Calculated?

September 17, 2020 By Kathryn Vercillo Leave a Comment

You’re going to retire in the relatively near future. You intend to get some or all of your retirement income through social security benefits. How will that work? Many people aren’t quite sure how the Social Security Administration calculates their benefits. If you don’t understand that, then you might not know how much post-retirement income you can expect. And without that information, it’s very hard to plan for the future.

How Social Security Benefits Are Calculated

The Social Security Administration explains that they calculate social security benefits by taking the following into consideration:

The amount of money that you have earned in your lifetime from employment.
They adjust this amount to consider how average wages of changed over the years.
They base the adjustment on the 35 years you earned the most money during your lifetime.

Then it says, “we apply a formula to these earnings and arrive at your basic benefit” amount.

While the words sound straightforward, this is all a little bit confusing. After all, you probably don’t know how to adjust your wages for changes in wage rates across thirty-five years of employment. Moreover, this tells us nothing about the “formula” they apply.

Digging Deeper Into These Calculations

In order to better understand, we need to dig deeper. The Social Security Administration publishes an Annual Statistical Supplement that includes an appendix that provides us with more information about how social security benefits are calculated. The 2019 version explains that a basic calculation:

Assumes that you didn’t take any disability time during your working years. Further assumes that you didn’t work after becoming eligible for retirement.
They use “wage indexing” to calculate your lifetime earnings. This is how they figure out what you earned, adapting decades-old wages to modern standards of living. They base the adjusted amount on the year that you turn 60. For example, as of 2017, someone who earned $20000 in 1990 would have that count as over $47,000 towards their lifetime earnings based on the “wage indexing” math. You can see further examples of Wage Indexing math on this page.
Now about that “formula” – this is a weight of giving weight to “provide a higher replacement of earnings for lower-wage workers” in retirement. The SSA says that “the formula for persons aged 62 in 2019 is 90 percent of the first $926 of AIME; plus 32 percent of the next $4,657; plus 15 percent of the AIME over $5,583.”

So, as we dig deeper, we see that social security benefits are calculated based on what you earned (at today’s current value for those earnings) for the 35 highest-paid years of your career. This number is then adjusted with that “formula.”

What Can Change These Basic Social Security Benefits?

However, additional things can increase or decrease your basic benefits. Varied factors include:

Early retirement; if you retire at age 62, you can still get benefits but they’ll be lower than if you wait to retire until age 65
Late retirement; if you retire later than 65, you’ll typically increase the amount of benefits you can receive
Continuing to earn money after age 61 but still retiring at 65
Long periods of not working during your working years
Cost-of-living adjustments for the years after you’ve turned 65
Military service, pensions, railroad work and other factors that impact the Social Security tax you’ve paid

This is complicated stuff. No wonder many people aren’t sure how social security benefits are calculated! There is a worksheet here that can help you calculate all of this.

Get an Estimate of Your Social Security Benefits

The link above will take you to a worksheet that you can print out and fill in yourself. It should provide you with an accurate representation of what you can expect to earn in social security benefits. However, if that’s too much work for you at the moment, you might instead wish to use the Social Security Administration’s Retirement Estimator.

This is not going to give you the exact number. It fails to take into consideration many of the more complex details about how social security benefits are calculated. That said, it can give you a good starting point to guess what you are likely to earn in social security income. To keep things even simpler, although perhaps not quite as good of an estimate, the SSA also offers a Quick Calculator.

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Here’s What You Need To Know About The Latest Social Security Scam

July 10, 2019 By Amanda Blankenship Leave a Comment

Scams aiming at your finances are nothing new. The latest Social Security scam, however, could cause you quite a bit of trouble if you catch yourself falling for it. Here’s everything you need to know and how to identify a scam to avoid getting burned.

Scams Targeting Seniors

Many times, these scams target senior citizens or people who may otherwise be fooled by their tactics. In a lot of instances, seniors aren’t always as mentally aware as they once were, which makes them more susceptible to these kinds of crimes.

The Latest Social Security Scam

Those looking to scam seniors have been calling and claiming to be the Social Security Administration (SSA). When the person answers, they are threatened by the scammer with suspended benefits if they don’t provide personally-identifying information.

Others are calling saying that there has been criminal activity linked to your Social Security number. As a result, you are told you must resolve it or your benefits will be put at risk. In some cases, you may be asked for your social so that the SSA can sort out some issue with your account.

Don’t fall for it! If you are collecting Social Security, it is important to know the signs of a scam.

How to Identify a Scam

Always avoid giving out personally-identifying information over the phone. You should also know the SSA will never call and threaten to suspend your benefits. Occasionally, they may call you asking for information. Unfortunately, scammers can call from numbers that appear to be the SSA. If you’re unsure, hang up, and call the SSA back immediately. Call (800) 772-1213 to speak to an agent to legitimize the call.

If you suspect someone is trying to scam you, hang up immediately and report it. Visit the Federal Trade Commission (FTC) website for information about reporting scams.

If You’ve Been a Victim

Maybe you’re reading this thinking to yourself, “Oh no, I’ve already given my Social Security number out to a scammer.” If that’s the case, you’ll need to do a few things quickly to minimize any damage to your life and finances.

Contact the FTC. Officials will help guide you through what you should do next.
Then you’ll want to contact the SSA. If someone has your social, they’ll be able to impact your benefits. Explain you think they may be at risk. The SSA agent you speak with will be able to advise you in your next steps. In some cases, this may lead to you being issued a new Social Security number.
Freeze your credit. This way, the scammer won’t be able to open fake accounts in your name and go into debt.
Keep a close eye on your accounts and credit score. Check it every month or so to be sure there hasn’t been anything suspicious going on.

The best way to avoid getting scammed altogether is not letting it happen. Anyone calling you claiming to be the SSA is lying. If you think about it that way, you won’t fall victim to this scam. Just be sure to call the SSA back and be sure!

Readers, have you heard anything about this scam?

Can You Really Retire at Age 50?

June 20, 2019 By Tamila McDonald 1 Comment

For many, the idea of retiring at age 50 sounds amazing. However, many question if it is even realistic. Considering that anyone born after 1960 won’t qualify for full Social Security benefits until age 67, that leaves 17 years before they could access that source of income if they stop working at age 50. Plus, most retirement accounts – like 401(k) and IRA accounts – won’t allow you to make withdrawals without penalties until age 59 ½, leaving an 8 ½-year gap. But, even with that, that doesn’t mean retiring at age 50 isn’t possible.

How to Retire at Age 50

If your goal is to retire at age 50, you’ll need to start planning immediately. If you don’t plan on working once you retire, you have to have enough saved to cover the rest of your life. With the average life expectancy sitting just below the 79-year mark, that means having enough money to support yourself (and possibly your household) for 29 years or longer.

As daunting as that may seem, it is doable. It just requires some planning, diligence, and dedication. Here’s how to get started.

Save as Much as Possible

Retiring early requires a substantial amount of savings. Along with having a robust retirement account, giving you something you can tap once you reach age 59 ½, you’ll need another source of funds to cover that 8 ½-year gap.

Many who aim to retire at age 50 open investment accounts beyond their retirement savings vehicles. Often, these accrue more in interest than traditional savings accounts, allowing your money to grow more quickly. However, they aren’t risk-free, so you need to consider your risk tolerance and choose options that are right for you. For example, index funds, target-date funds, and many mutual funds provide a level of diversification, so they may be a good place to start if you are new to investing.

Reduce Your Expenses

The less you need to spend each month, the less you’ll need to save. Tackle as much debt as possible before you reach age 50, and the goal becomes more realistic. Similarly, consider cutting back on unnecessary services, like premium cable packages, or other high-dollar expenses, like dining out, to make retiring early more manageable.

Calculate Your Post-Retirement Spending

In order to determine how much you will need to save, you need to understand what you’ll spend in retirement. This includes everything from debt payments to household expenses to medical costs. Plus, you need to account for any changes to your entertainment-oriented expenses. When you retire, you may want to travel, see more movies at the theater, or embrace a hobby, all of which can impact your spending estimates. You’ll also have to contend with inflation, something that can significantly impact your spending power over time.

Planning for healthcare costs can be especially challenging. You won’t have access to Medicare until you are eligible for Social Security benefits. Even if your employee has post-retirement medical options available, the premiums are usually higher than they would be if you are still working, so you need to explore your options thoroughly to estimate the cost.

Once you calculate your spending, you can use that information to extrapolate how much you need to save. Usually, planning to use a withdrawal rate of 2 to 4 percent is a smart move. If you want to be conservative and use the 2 percent rate and estimate you’ll need $50,000 a year, then you’d have to save $2.5 million before you reach age 50 if that’s when you want to retire.

Consider a Partial Retirement

If you can’t save enough to fully retire at age 50, that doesn’t mean you can’t dramatically change your relationship with the working world by then. For example, you may be able to save enough to cover part of your expenses and then opt to work at a job you enjoy on a part-time basis until Social Security kicks in or you can access other retirement savings. Not only will this provide you with some flexibility and additional income, but it also gives you more time to lower your expenses and save.

Then, when you reach age 59 1/2, 67, or anything in between, you can reassess and shift to a full retirement if it is viable. That way, you can change your lifestyle earlier, making your years feel more fulfilling and rewarding.

At what age do you think you will retire? Does 50 sound realistic or even possible for you? Share your thoughts in the comments below.

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Deciding When to Take Social Security

January 23, 2019 By Doug Carey Leave a Comment

Under today’s rules, a person can begin taking social security benefits as early as age 62. The full retirement age (FRA) used to calculate social security benefits ranges from 65 to 67, depending on when you were born. But one can also wait as long as age 70 before taking benefits, and the annual benefit increases the longer you wait. So an important question arises: How does a person decide when to begin taking his or her benefits?

For those who are in relatively good health and do not need social security payments to meet current expenses, it can be a good decision to wait until the person’s FRA or even as long as possible (age 70) before taking benefits. The reasoning is straightforward: You’ll receive a penalty if you start your benefits early and you will receive a credit if you delay your benefits.

If you decide to receive benefits before reaching the FRA, the benefit reduction is 0.56% for each month before that age, up to 36 months. If you receive benefits for more than 36 months before the FRA, the benefit reduction is another 0.42% per month. But by delaying the first year in which you receive your social security benefits until after your FRA, your monthly checks will be higher over the long-run by as much as 8% each year until you reach age 70.

Running the Numbers

Understanding how much money one needs to retire comfortably is of utmost importance when planning for retirement. In addition to this, it is also extremely important to understand how to generate the most income in retirement as possible.

The best way to take the benefits, penalties, and any credits into account is to look at a break-even analysis, which I performed using a calculator called When to Take Social Security. It is very informative to see at which age the total accumulated benefits break-even with, and then surpass, the accumulated benefits that occur when taking social security at earlier ages.

The chart above assumes that this person turns 62 next year and has made $70,000 per year (in today’s dollars) for the past 35 years. Also, all projected dollars are in today’s dollars and are not adjusted for inflation.

Let’s start by looking at how this person fares when taking benefits at age 62 vs. age 65. By delaying the first social security payment to age 65 this person will break-even vs. taking the first payment at age 62, in terms of accumulated benefits, when he is 77 years old. If he then lives until age 90, he will receive over $66,000 more during his retirement. Waiting until age 70 gives this person a break-even that is similar. The break-even vs. taking the first payment at age 62 would be 78 years old. The difference in accumulated benefits, if he lives until age 90, would be nearly $162,000.

What It All Really Means

The cold, hard reality of making decisions such as this is that you are betting on how long you will live. Clearly, if you believe you will live until age 90 and you do not need your social security payments right away to meet expenses, you should wait until age 70 before taking social security. The Social Security Administration (SSA) algorithm that determines these payments was set up so that the typical person will receive the same accumulated benefits over time given average life expectancies today.

Of course, not everybody is in average health, so this is probably the biggest factor you should consider if you’re deciding when to take Social Security. Basically, if the person in this hypothetical illustration decides to take his first social security payment at age 65, he is betting that he will live to at least age 77, which is the break-even age for accumulated benefits.

In an attempt to save money, the SSA no longer sends out information on estimated benefits. However, there are a whole host of websites that help you determine what your social security payments will be. It is a good idea to run scenarios yourself in a detailed retirement planning software application, changing the age in which you receive your benefits. You can then see how your accumulated benefits change as you change the age in which you receive your first payment.

Social Security Accounts for 66% of Retirees’ Primary Income

January 9, 2019 By Amanda Blankenship Leave a Comment

It’s no surprise millions of senior citizens depend on Social Security income to pay their monthly bills. However, the number of retirees who rely on Social Security as their primary source of income is steadily increasing. In fact, approximately 66 percent of seniors believe it will be their primary source of income throughout their golden years.

Why You Can’t Depend on Social Security Income

You may be thinking, “well, isn’t that what Social Security is for?” Many Americans don’t realize that Social Security isn’t designed to replace your income. Instead, it is supposed to supplement your retirement income. On top of Social Security, you should have retirement accounts (like a 401K or IRA), investments, and/or a pension to fund your day-to-day expenses.

When it boils down to it, Social Security benefits will only replace about 40 percent of your pre-retirement income. Considering most retirees need about twice that to live a comfortable life in retirement, relying on Social Security as your primary source of income may be a grave mistake when it comes to your financial well-being. Not to mention, future cuts in retirement benefits are still a possibility.

Social Security was only ever meant to prevent poverty in older Americans. Typically, someone’s Social Security benefits will cover basic needs, such as housing, food, utilities, clothing, healthcare, and transportation. However, it won’t cover any entertainment or enjoyable aspects of life. Who would want to live in retirement that way?

How to Financially Survive Retirement

The key to financial success in retirement is finding ways to boost your income before (and after) you leave the workforce. For those who are still working, you still have time to contribute to savings, 401K, and IRA accounts. It also isn’t too late to chat with a financial advisor about investing some of your cash.

Retirees who depend on Social Security still have options to boost their income during their golden years. You can always try a part-time job. Consider consulting in your former field, working for a nonprofit you support or turning a hobby into a small business. For instance, seniors who enjoy crocheting or knitting can make extra money selling items on Etsy or at pop-up markets.

You can also take a look at your assets and see if any of them may serve as a secondary source of income as well. If you have extra space in your home, consider renting it out. You may also look for items you have around the house that are of value that you can sell.

Bottom Line: Don’t Rely on Social Security

Even now Social Security benefits are barely enough to keep retirees afloat, and two-thirds of the retired population heavily rely on them. Looking into the future, those benefits could disappear as early as 2034. The only way to prevent yourself from living in poverty during retirement is searching for new ways to make more money to add to any benefits you’re receiving.

For those who haven’t retired yet but are concerned Social Security benefits won’t be around when they retire, it is never too late to start saving and prepping for your life after you leave the workforce. Start a retirement account as soon as possible.

Readers, do you currently collect Social Security? Do you have supplemental income?