Are you factoring Social Security in your retirement planning? For many, it is important to know that projections indicate Social Security Trust Funds will be depleted by 2034. Further, Social Security Trustees reported that 2021 is a crossover year where the program’s costs exceeded its income. This article discusses the importance of Social Security in retirement planning, some possible fixes or further challenges to Social Security proposed by lawmakers, and planning actions individuals can take.
The stakes are high. Social Security was designed to cover about 40% of a worker’s previous income and the balance is supposed to come from savings investments. The Social Security Administration estimates benefits represent about a third of income for those 65 and above. However, some people lack adequate savings. Half of retired married couples and about 70% of retired singles rely on Social Security for at least half of their income. Twenty-one percent of married and 45% of unmarried retirees receive at least 90% of their income from Social Security.
Benefits are based on how much someone paid in FICA taxes, birth year and when an individual’s benefits commence. FICA tax is on your gross wages up to $142,800 at the rate of 6.2% for both employees and employers. The self-employed pay the combined 12.4% tax. Income above $142,800 does not increase your benefit (nor is the excess income subject Social Security payroll tax currently – see potential fixes below).
The average Social Security benefit in 2021 has been about $1,543. The maximum benefit is about $3,148 for those who retire at their full retirement age. Reduced benefits are available at age 62, and increased benefits are available if you defer retirement until age 70. For example, the estimated benefits for a person with average earnings of $50,000, born in 1959 breakdown as follows:
- At full retirement age (66 years and 10 months), they would receive $1,785 each month.
- Reduced benefits at age 62 would come out to $1,264 per month.
- At age 70, they would get $2,237 every month.
Potential fixes for Social Security
Possible solutions include adding revenues to maintain benefits at the current level, lowering benefits to match incoming revenues or a combination. Lawmakers must either make tough decisions or continue kicking the can down the road. It’s not for lack of ideas. Googling “Social Security reform” yields some 2.1 trillion results. There are almost a dozen proposals currently, including some that expand benefits (and increase costs). Here is a summary:
- Increase the minimum Social Security benefits.
- Increase Social Security for individuals after 15 years of retirement.
- Repeal the Windfall Elimination Provision.
- Increase the age for children's benefits to 26, and add benefits for dependent grandchildren.
- Change the cost of living calculation.
- Extend the full retirement age for younger workers.
- Increase the taxable wage base but not the maximum benefit.
Three solutions for people looking to retire with more wealth
- Get your financial house in order and save more. Here’s a method to help you calculate how much you should save for retirement.
- How much income will you need to maintain your lifestyle in retirement? Some use the guideline of 80% of your working income.
- Determine your projected Social Security benefits at full retirement age at SSA.gov.
- Subtract the projected Social Security benefit from the income you will need, and divide by 0.04 (using the 4% Withdrawal Rule).
- Adjust as needed for inflation. This figure represents the target wealth you’ll need at retirement. Then use calculators for the amount of annual savings required.
- Other Wealth: These resources might reduce the amount you need to save for retirement.
- Additional cash flow such as pensions, rental income, trust income, notes receivable, etc.
- Windfalls, such as inheritance, business sale, employee stock options, etc.
- Work Longer
- Retiring at 65 and beginning a life of leisure may be an outdated concept.
- Instead, a modern version may be to find a sense of purpose, balancing vocation with vacation and staying “plugged in” – avoid becoming bored then boring, says Mitch Anthony, author of The New Retirementality.
- Part-time work or a second or third career can also make your retirement savings last longer.
- Look to outsource your skills in gig work through sites such as Upwork, Fiverr, TaskRabbit and others.
Consult your trusted financial advisor to assist as needed. As uncertain as it may be, Social Security is one of many factors to consider in your retirement planning. For a more conservative approach, many have adopted plans that do not rely on Social Security. Whether you include Social Security or not in your planning, uncertainty and life’s changes are two reasons why I recommend people periodically review and adjust their plans.
May this sage advice help you to secure your future wisely.