The majority of Americans don’t have much faith in the future of Social Security. A recent GOBankingRates survey found that 46% of Americans believe the program will offer a lot less than it does today by the time they retire, and 23% believe the program won’t exist at all by the time they retire. Yet despite this, most Americans plan to depend on Social Security to fund at least some of their retirement — 26% said they plan to use Social Security to fund less than half of it, but 51% said they plan to depend on it to fund more than half (31%) or all (20%) of their retirement.
Can Americans Rely on Social Security as It Stands To Fund Their Retirement?
“With the rise of inflation and the overall cost of living, unless you can truly stick to a budget — which in my experience most people don’t — Social Security is not sufficient for most retirement expenses,” said Frank Murillo, partner and managing director at Snowden Lane Partners.
“What people envision spending in retirement and what they actually spend are two different things,” he continued. “With the clients I work with, we go through an exercise I call ‘recreating the dollar’ where we piece together sources of income to mimic what they had through their working years. Then we stretch that for a reasonable time span, and the results of what they can actually spend are eye-opening.”
Social Security was never meant to be a retiree’s only source of retirement income, said Wade Pfau, co-director of the Retirement Income Center at The American College of Financial Services.
“It is meant to replace about 40% of the average indexed lifetime earnings of someone who worked and earned an average wage over their lifetime,” he said. “Many retirees will seek to replace a higher percentage than this.”
Most experts suggest aiming to plan for retirement income that is at least 70% of your pre-retirement income.
“Since Social Security is likely to make up only a portion of your retirement income, it is important to have a well-rounded strategy to meet your income needs in retirement,” said Katherine Tierney, CFA, senior retirement strategist at Edward Jones. “We recommend you act now to understand what you need to do to achieve your ideal retirement. If you’re unsure where to start, a financial advisor can help you outline your goals, develop a strategy to meet them and measure your progress along the way.”
What To Do If You Must Rely on Social Security To Fund Your Retirement
Although financial experts do not recommend living on Social Security alone, for many Americans, this is their only source of retirement income. The GOBankingRates survey found that 25% of Americans have not started saving for retirement and that 36% have less than $10,000 saved.
“Each situation is unique and some people can live on Social Security only,” said Colleen Carcone, director of wealth planning strategies at TIAA. “If your only source of income is Social Security, remember that continuing to work and delaying the start of your Social Security benefits can close the gap [between how much you need for retirement and how much you have saved] because a delay would mean a bigger check when you do start.”
What Will Social Security Look Like in the Future?
As the survey found, most Americans believe that Social Security benefits will be reduced or cease to exist in the coming decades. As it stands, the Social Security trust fund is set to run out in 2035, so are these concerns warranted?
Most experts believe Social Security will continue to exist, but to keep it going will likely require some changes in the current program.
“There are a few simple solutions that will likely occur,” said Jeremy Finger, CFP, founder of Riverbend Wealth Management. “First, we could eliminate the earnings cap on Social Security tax so that all income above $147,000 is taxed. This could extend the Social Security trust fund. Second, [the Social Security Administration could] increase the full retirement age, which is kind of a pay cut. For example, people who were born after 1970 may not able to get full benefits until age 68 or 69. Third, [they could] increase the payroll tax on Social Security.”
One or a combination of these solutions should balance the Social Security trust fund, Finger said. However, because there are a lot of unknowns, Finger does not recommend relying on Social Security to fund your retirement.
“I would not advise clients to make their Social Security decisions based on what the government may do,” he said.
No matter how the Social Security trust ends up being funded — and most experts believe this will happen before it gets depleted — there is a chance that benefits will be reduced in the coming years.
“Social Security could be reduced to match incoming revenue from individuals and their employers,” Carcone said.
The uncertainty surrounding the future of Social Security should be taken into account when retirement planning.
“While most advisors consider current funding estimates as provided by the Social Security Administration for retirement planning, one should consider possible changes to the system,” said Wendy S. Baum, a financial advisor with Equitable Advisors. “The more saved over time with pension strategies and portfolio building, the less reliant one will be on Social Security benefits.”
Read More: https://www.yahoo.com/video/most-americans-plan-rely-heavily-110242798.html