The future of Social Security: How to prepare
As questions about Social Security grow, the amount young Americans save is even more critical. Here's how you can work toward a plan that strengthens your financial future.
For generations of savers, Social Security has been an essential building block of retirement planning, providing a guaranteed monthly payment for life that adjusts for inflation. Though never intended to be the sole source of retirement income, many of today's younger Americans are realizing the size of that monthly payment when they retire may be smaller than they'd anticipated. In fact, according to an August 2023 survey from The Nationwide Retirement Institute, 39% of 27 to 42 year-olds believe they will "not get a dime" of the Social Security benefits they have earned, and those nearing or already in retirement have concerns about the solvency of the program as well.Footnote 1
How justified are these concerns? If no changes to the system are made, the Social Security Administration will be unable to pay scheduled benefits in full and on time starting in 2035, according to the most recent annual report from the Social Security Board of
Trustees.Footnote 2 But that doesn't mean you'll get no money when you retire. According to the report, you'd likely still receive about three-quarters of your Social Security benefit. The main cause of the shortfall is simple: The number of people claiming benefits is rising, while the number of working-age people contributing to Social Security via payroll taxes is declining. A recent Chief Investment Office report, "
Social Security Insolvency: What Can Be Done and What's at Stake? (PDF)," answers key questions about projected shortfalls, possible solutions and what individuals need to know about their own benefits.
How much more should you save?
A retiree who had higher earnings in their lifetime could see a 23% reduction in Social Security benefits in 2035 if no changes are made to the system. Here's what you might need to cover from your own savings to make up that amount.
Current monthly benefit:
$3,338
Reduced monthly benefit:
$2,570
Note: For a retiree in 2024 whose earnings equaled or exceeded Social Security's maximum taxable income and filed at full retirement age
Source: Social Security Administration
Many proposals have been floated to strengthen Social Security, says Gal Wettstein, senior research economist at the Center for Retirement Research at Boston College. But it's likely that today's workers will rely less and less on Social Security as a key piece of their retirement income strategy if no fix is implemented. "For younger savers especially, the money you personally save and invest is likely to continue to play a larger role in determining your financial security in retirement than Social Security," says Jeremy Kaneer, director, Investment Solutions Group for Merrill. Using the four steps outlined below, you can develop a plan designed to create the income you'll need in retirement.
The money you personally save and invest is likely to continue to play a larger role in determining your financial security in retirement than Social Security.
— Jeremy Kaneer,
director, Investment Solutions Group for Merrill
Save and invest more for your future
Because of the reduced role that Social Security may play in your retirement income, it's important to boost your saving and investing strategies. Getting an early start can make a big difference. For example, thanks to the power of compound interest, someone who started saving $500 a month at age 25 would have $588,000 at age 55, assuming a 7% long-term return, while someone who began saving the same amount 10 years later would only have about half as much or $255,000.Footnote 3
It could also help to reconsider your asset allocation. Though fixed income has a place in providing retirement income, investing a greater portion of your savings in equities and dividend-paying stocks might help to increase your nest egg's growth potential. You might also consider adding exposure to real estate — either by investing in real estate investment trusts (REITs) or buying an income-producing property.
Another option to consider is investing a portion of your savings in an annuity, says Kaneer. These insurance contracts offer tax-deferred growth on your assets and can create a consistent stream of income for life, no matter how long you live, or for a time specified in the contract. "An annuity can provide an additional guaranteed income stream to supplement what you get from Social Security, and it could make it easier for you to manage ongoing day-to-day expenses in retirement," he adds. It's important to understand the various types of annuities and what they can offer as well as their risks as you establish an appropriate investment allocation for your goals, age, liquidity needs and risk tolerance.
Take advantage of all your pre-tax savings options
If you're eligible for a 401(k), consider contributing the maximum amount allowed. (
Use this chart to learn more about contribution limits popup). Contribute at a minimum the amount needed to get your full employer match if your employer offers one. Then revisit your contribution amount every time you get a raise to see if you can contribute more. Once you've maxed out your 401(k), "you may want to consider contributing to a Roth IRA if you're eligible" adds Kaneer. "You pay taxes on those contributions up front, which means no taxes on withdrawals in retirement."
Also, if your employer offers a high-deductible health plan, consider selecting it so that you can contribute to a
health savings account (HSA). "Contributions come out of your paycheck pre-tax, grow tax-free and come out tax-free too as long as you use the money for qualified medical expenses," Kaneer says. The funds can roll over year to year, helping you prevent healthcare costs from eroding your retirement savings. Think of the funds in your HSA as long-term savings — not just a pool of money to draw upon to help cover immediate medical costs.
Keep tax efficiency in mind
Knowing
how to draw on your retirement assets in the most tax-efficient way is another key to boosting your retirement income. Generally it's best to withdraw from your taxable accounts first, then tax deferred, followed by tax free because of the rate at which each of these withdrawals is taxed, says Kaneer. However, your circumstances may dictate another way to optimize your income stream with taxes in mind.
Time your Social Security benefit carefully
While Social Security could play a more limited role in your retirement income in the future, it does represent a foundation upon which you can build your monthly income. Don't leave any of it on the table if you can help it. The key to
maximizing what you get from the program is timing when you claim your benefits. Only about 1 in 5 people ages 27 to 42 plan to delay filing for Social Security, according to the Nationwide survey even though it will raise their monthly benefit. And claiming before full retirement age reduces your benefits — for life. For every year you wait to claim up to age 70, your monthly benefits increase by about 8% per year. That can be an important consideration for younger people who are still saving and may need to plan for a lifetime that could reach age 100 or beyond.
No matter what happens to Social Security, "maximizing the income you get from all your sources will go a long way toward helping you live the life you want in retirement," says Kaneer. And regularly reviewing your strategies as your expenses and financial priorities change can help you keep that retirement goal on track.
Footnote 1The Nationwide Retirement Institute, "2023 Social Security Survey," August 2023
Footnote 2Social Security Administration, "The 2024 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds," May 2024
Footnote 3Bankrate.com investment goal calculator, accessed February 2024
This material should be regarded as educational information on Social Security and is not intended to provide specific advice. If you have questions regarding your particular situation, you should contact the Social Security Administration and/or your legal advisors.
This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any information in this material, you should consider whether it is in your best interest based on your particular circumstances and, if necessary, seek professional advice. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.
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