The Social Security Administration estimated in its 2022 annual reports that it will be able to pay the planned benefits on time until 2034. Once the fund’s reserves are exhausted, continued income taxes should be enough to pay 77% of the planned benefits . Of course, the government could change the program, the taxes, or both, which would change that trajectory.
While most people expect changes in the Social Security program, the reality is that Social Security was always intended to replace part of your retirement income. For the majority, Social Security represents only 33% of retirement income, hence the importance of saving for retirement.
Yet investors want to know what role should Social Security play in their retirement planning. Unfortunately, there is no magic formula. I think it all depends on your expenses. You can only do three things with your money: pay taxes, save it, and spend it. For a quick estimate on the back of the napkin, check your tax return to find out what you paid in taxes and what you saved for retirement. It leaves what you spend.
The process of developing a financial plan is to prepare for the day when expenses will exceed income, which means retirement. There are few, if any, sources of guaranteed retirement income. Pensions are rare; annuities are only as good as the insurance company backing them; cash is subject to inflationary pressures, and Social Security. The rest of your expenses come from your savings, such as your IRA, 401(k), or brokerage accounts.
When developing a financial plan, I recommend using different variables to account for unknowns such as tax increases, rising inflation, market performance, selling or holding an asset like a business or a home, the longevity and even the solvency of Social Security. By running projections for different scenarios, you can get an idea of what you are counting on Social Security for your retirement income. If you’re not comfortable with your level of addiction, that’s an indication to make a change, whether it’s the amount you’re saving today or a lifestyle change in the future. retirement.
As you approach 62 – the earliest you can apply for benefits – you again have more decisions to make. You can receive benefits at a reduced amount or defer them until age 70, when you can maximize them. Again, there is no magic number that works for everyone. However, I generally recommend taking Social Security benefits before supplementing your retirement income needs with assets from your portfolio. The more you need to withdraw from your portfolio, the more fixed income investments you will need according to the ten-year rule. This can result in the loss of growth traditionally found in stocks. The stock assets in your portfolio should grow faster than the annual increase you can get by delaying Social Security advantages. In addition, Social Security usually has no beneficiary. Benefits cease once you die; however, your heirs or estate may receive what remains in your retirement accounts.
Social Security whether or not you are there when you retire; however, you can control how much you save today.
