Is Social Security a dependable source of income? Will Social Security be here when I need it? Can I count on Social Security income in retirement? What’s the best way to claim my Social Security Benefit? When do I take my Social Security Benefit?
The questions are many and the answers ever so confusing.
While we don’t know the unknowable, and we can’t predict the unpredictable, in my professional opinion I can speculate on one thing for certain: as long as we’re paying Social Security taxes, there will be something!
What it will look like we don’t know, but more than likely there will be something. Our country is dependent on the economic outflow of Social Security. In 2017, according to the Social Security Administration, “over 62 million Americans will receive approximately $955 billion in benefits”. Of this amount, $56 billion will be paid to retired workers, an average benefit of $1,360 for the 41.2 million beneficiaries of Social Security. I have a hunch it will be around in some capacity.
But, let’s clear the air. Social Security was NEVER intended to be a primary source of lifestyle income in retirement. It was intended to simply supplement retirement income much like the purchase of a private Medicare Supplement plan is intended to “supplement” your Medicare insurance. The formula from years gone by for retirement income planning was that Social Security would provide 39% of retirement lifestyle income, traditional pensions, provide an additional 18%, and the remainder, personal savings and investments would provide 43% of what you needed to live on during retirement. Social Security is getting a lot of focus these days for a number of reasons.
First of all, it’s under-funded. But then tax laws can be legislated and change that, more jobs can be created so we have more workers contributing to the system by paying Social security taxes, and Social Security payment structures can be reformed. The second reason I believe Social Security is foremost on our hearts and minds is that many boomers retiring do not have those nice, rich defined benefit pension plans. Those days are gone. Finally, and what I would argue is the real reason, is that we have a savings crisis in America. Forty-three percent of retirement income historically was intended to come from personal savings and investments.
Let’s look at a conceptual example for the sake of simplicity just to drive home the idea that the real issue with retirement income is not the solvency of the Social Security system, but the lack of personal savings. If you need $4,000 monthly to live on, and you get the average Social Security benefit of $1,360 and don’t have a pension, then you’ll need your personal savings to create approximately $32,000 annually. How much savings do you need to successfully withdraw $32,000 yearly to supplement Social Security for a 30, 40, or perhaps 50 year retirement journey? I’m not a mathematical genius, nor do I want to be, but I can say that most likely, you don’t have the savings needed to protect your retirement journey. Simple math would suggest that you need around a million dollars.
According to a recent report from the Economic Policy Institute, the average American family has a mean retirement savings of $95,776. Since the average American family is not prepared to meet the golden years with adequate financial resources, what strategies and tactics should be considered so America doesn’t accelerate the statistics of the elderly poor? First of all, we have to get our heads out of the sand and admit that there’s a problem. The first step in identifying solutions to fix any life problem is to admit there’s a problem, define the problem, take an assessment of where you are versus where you want to be, and then create recovery strategies and tactics that can be implemented, measured and continuously improved upon. Solutions to financial issues become self-evident when you have the facts, the data, and get real with the problem.
If you find yourself like the millions of Americans retiring without adequate financial resources, consider these 8 Financial Recovery Strategies:
- Take an assessment of your spending behaviors to gain clarity on how you got where you are, get real with the behaviors that are sabotaging your financial future and make some personal changes – most money problems tend to be spending problems, not income problems and the only way.
- Don’t be so quick to claim your Social Security Benefits – delaying the claiming of your benefit by working longer is the most obvious approach to bridging a portion of the income gap. Working longer also allows you to accelerate your savings. You may be ready to exit your job/career because of the pressure, but unless you have sufficient financial resources to last you 3-4 decades, you really need to think about working beyond age 65, even if it’s part time. Remember, Social Security benefits do not create lifestyle.
- Downsize your lifestyle, your housing, etc. Measure the amount of “dormant” retirement assets you have sitting in your home and whether it makes sense to be property rich and cash poor. If you’re putting more than 30% of your income into your home, you may want to seriously consider downsizing. If you have a second residence, or rental properties that don’t have a demonstrated financial value proposition, then you have decisions that can be made that could save your retirement.
- Get real with spending habits on adult children or on grandchildren – do you keep contributing to the lifestyle of adult children rather than saving for your golden years or even if you’re already retired, you keep funding the lifestyle of your adult children at your own expense. Or, have you assumed their college debt? They have many more years to work and more than likely they will not be there to bail you out when you’re trying to live on your social security income and need to pay for healthcare; there’s not a better time to exercise the tough love muscle than during the golden years.
- Get a solid income benchmark for what you need for a dignified retirement. It’s essential that you know what your lifestyle costs are not only today but well into the future, adjusted for inflation. It’s not about scaling back in retirement, it’s about living the dream so you’ll need to understand how much you need and it all begins with the cost of your retirement lifestyle.
- Partner with a retirement income planner to create an income plan for the rest of your life. The financial advisor that got you to retirement will most likely not have the skill sets and competencies to get you through retirement since you are now in an income distribution phase and no longer in the accumulation phase of life. Understand the differences and align yourself with a like-minded retirement income planner who will act as your “financial health gatekeeper” and assemble a team of experts from the critical disciplines who will work together on your behalf. You’ll need tax planning, financial planning, healthcare planning, longevity planning expertise on your team. Don’t go at it alone because retirement is not the time to be making financial mistakes, especially when it comes to the pay check you need monthly until the day you walk out on life.
- Assess the value of creating guaranteed lifetime income streams if you don’t have a pension. The insurance industry has created some of the most innovative “pension look alike” solutions that can create guaranteed income streams so your not depending on the stock market to create your lifestyle. You need more predictability and certainty on your retirement journey so you’ll want to explore the most suitable and appropriate fixed income solutions for your unique needs. These solutions are in the annuity product lines, but don’t be deceived: Not all annuities are created equal so buyer beware. An annuity is simply a financial tool that solves income problems and you don’t want to be sold one without having a plan that drives the decision to add an annuity to your retirement portfolio.
- Don’t put your money at risk to recover from years of insufficient savings. The markets are not your best friends at all times in retirement and putting your money at risk for the benefit of growth may not serve you well. Use the rule of 100 as a gauge to determine how to bucket your nest egg. This is a simple approach to measuring the amount of risk you should be taking when you’re depending on your retirement nest egg to create lifestyle during retirement. So, if you’re 65, then this rule presumes that you should have no more than 35% of your nest egg put at risk. Just like all “rules” or “guidelines”, they should not be prescriptive but adjusted to meet unique life needs, income sources, etc. How much you put where should be driven by your retirement income plan and how you plan on funding your lifestyle, healthcare needs to include long term care, and lost income for couples who depend on two Social Security checks to live on.
The moral of this story is to drive deeply the notion that Social Security was never intended to replace all of your income during your working years. It was simply a “supplement” to other sources of income which primarily should come from personal savings.
The only way to manage the savings crisis in our nation is to change our personal attitudes and behaviors about the money matters we can control: saving more and spending less.
Jeannette Bajalia, author of "Retirement Done Right" and "Wi$e Up, Women," is president and principal adviser of Petros Estate & Retirement Planning, where she has designed and implemented innovative estate-planning solutions for clients and their families. She also is founder and president of Woman’s Worth®, which specializes in the unique needs facing women as they plan for their retirement.
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