Atlanta Financial Advisor Addresses Big Concern: Will Social Security Be There for Me?
As the Atlanta Wealth & Pension team at Linscomb & Williams, we have helped many families with their financial planning needs. In this process, we are often asked about Social Security benefits – and many times the question revolves around: "Will Social Security be there for me when I’m ready to retire?"
Here’s what we tell them:
Although Social Security retirement benefits aren’t lavish – the average monthly payment is about $1,500 per month – they still form an important component of most people’s retirement plan. But will Social Security benefits continue to be around when you reach your planned retirement age? That’s a very good question.
The Trustees of the Social Security Administration (SSA) prepares an annual actuarial report to Congress. The trustees report that the system is fully funded through 2035. After that, if no action is taken to shore up funding, it projects that the system can continue paying about 79 percent of the estimated benefits promised.
This could, of course, lead to a reduction in benefits. While politicians often delay addressing such issues, the history is that they always find a way to work on mechanisms to receive funding. In the past, legislation has helped.
Currently, Social Security is funded via payroll taxes, taxes on Social Security benefits received, and interest on the trust funds. Despite the unpopularity of tax increases, Congress may decide to raise taxes to fund the SSA due to the popularity of the program, to tax existing benefits more, or to raise the age at which people can start taking these benefits. (All three have been solutions at some point in the past.) Even in this year's presidential campaign, there have been proposed solutions to tax higher-income earners more to add funds to the Social Security trust fund. But regardless of the election outcomes, we expect that government officials will indeed craft a combination of strategies to sustain the payment of full benefits far into the future.
That said, there are also some things you can do, if you are inclined to worry about the availability of full future Social Security benefits when you retire.
The U.S. population is rapidly aging, and the percentage of those over 65 is growing. This can place stress on the system.
If you’re concerned about Social Security still being around for your retirement, consider taking the following steps:
1. Maximize Your Personal Retirement savings
One way to make up for lost benefits is to save more on your own for your retirement! Retirement plans such as IRAs and 401(k)s can be tax-advantaged nest eggs to draw from in retirement.
If your employer offers a matching 401(k) plan, save at least enough to ensure you receive the maximum match. If your employer matches 100 percent up to 6 percent of your salary, for example, you’re leaving "free money" on the table if you don’t save 6 percent of your salary.
If you can’t contribute the maximum right away, try to raise your retirement contributions at least 1 percent per year.
2. Assess Your Risk
It’s also prudent to assess your risk should Social Security benefits be cut or eliminated. How much would you be affected?
Start with a preliminary retirement budget. Even if retirement is a long way off, it can still help to have a working figure to estimate your monthly expenses when the time does come. A fiduciary financial advisor can use your current budget to help you project forward.
Ask yourself some important questions. Will your mortgage be paid off, for instance, or are you still likely to have a monthly payment? While some expenses may disappear, such as transportation to work, others, like healthcare, may increase.
Calculate how much you’ll have saved in your IRAs and 401(k)s.
If you qualify for Social Security, the SSA provides an estimate of your benefits at retirement. It’s a good idea to have that estimate. If you didn't have the last statement mailed to you, go online to www.socialsecurity.gov and log-in to obtain a personal estimate of your benefits.
Include any other funds you expect to receive at retirement, such as pension or annuity payments.
When you add your projected retirement income and Social Security benefits together, does it cover your budget? How much risk is there of a shortfall if benefits are cut?
Ask your financial advisor to develop a risk management plan. How would you handle a shortfall if one occurs? Consider your options.
3. Minimize Your Taxes
Minimizing your taxes is never a bad idea. Planning to minimize your taxes in retirement can be a game-changer.
Traditional IRAs are tax-deductible and contributions to 401(k)s are made pre-tax. Both can be helpful strategies. Withdrawals from Traditional IRAs and 401(k)s are taxed at the existing rate. But Roth IRAs and Roth 401(k)s are not taxed when you withdraw funds in retirement, as long as you don’t withdraw them until you are at least 59-½ and have held them for at least five years.
Be aware that while Roth funds offer tax advantages in retirement, they don’t in the year you contribute – contributions are made with after-tax funds. Discuss your situation with a financial advisor to ensure you minimize taxes optimally at the different stages in your life.
4. Plan to Maximize Your Social Security Benefits
The amount you’ll receive in Social Security depends on several factors, including your eligible earnings over your lifetime. But, it also depends on factors like when you plan to commence taking your benefits.
The timing of your retirement can exert a major impact on the amount of benefits you’ll receive. Familiarize yourself with your options.
To start, you should know what your full retirement age is. This varies based on your birth year. For anyone born in 1960 and after, for example, the full retirement age is 67.
Regardless of your full retirement age, everyone becomes eligible to take Social Security benefits at the age of 62. If you elect to take your benefits right away (before your full retirement age), the amount you will receive is reduced by as much as 30 percent.
These reductions are permanent. Once you start taking benefits, the amount does not increase going forward, except for cost of living increases.
If you take your Social Security benefits at your full retirement age, as the term suggests, you’ll receive the full amount to which you’re entitled.
If you take your benefits later than your full retirement age, the amount you receive will increase. For every year you delay between your full retirement age and the age of 70, your benefits will increase roughly 8 percent. After the age of 70, there are no more increases. These 8 percent per-year increases can make a significant difference in the amount you can collect over your lifetime if you or a surviving spouse lives to normal life expectancy or longer.
The Bottom Line
If you’re concerned about whether Social Security will be there when you retire, talk to a fiduciary financial advisor now. Discussing your goals, savings, taxes and concerns can lessen the worry you have.
Linscomb & Williams has nearly half a century of experience helping families build, prepare and manage wealth. We’re a fee-only, fiduciary financial planning and investment management firm with offices in Texas; Atlanta, GA; and Birmingham, AL. Contact us to see how we can help you.