Podcast Summary
Retirement Income Guidelines: Retirement income guidelines, such as needing 70-80% of pre-retirement income, might not apply to everyone, especially those saving aggressively. Social Security's future sustainability adds complexity to retirement planning.
While saving for retirement is crucial, the common advice of needing 70-80% of pre-retirement income might not apply to everyone, especially those saving over 30%. Social Security, a major source of retirement income for many, is a significant factor to consider. Originating in 1935, Social Security was initially met with criticism but eventually became widely accepted as a foundation for retirement security. However, its future sustainability is a topic of debate. It's essential to understand the assumptions behind retirement income guidelines and consider alternative methods for retirement planning. While saving is crucial, it's also essential to understand the role of Social Security and the potential implications for your retirement.
Social Security misconceptions: Despite covering roughly 40% of retirement income for many, Social Security is crucial for keeping millions above the poverty line. Misconceptions include believing it's saved for individual retirement accounts and that staying home or retiring early lowers benefits. The program is projected to run out of money but won't stop paying benefits.
Social Security was intended to be a part of a three-legged retirement income stool, but now covers roughly 40% for many retirees. Despite this, it's crucial as it keeps 22.7 million Americans above the poverty line. The program is funded through payroll taxes, and you earn credits as you work, with eligibility requiring a certain number of credits. Misconceptions include believing the money is saved for individual retirement accounts, and that staying home or retiring early can lower benefits. The program is projected to run out of money in about 11 years, but this doesn't mean it will stop paying benefits. In the financial planning world, Domain Money offers a personalized approach, and Social Security is an essential component of retirement income planning.
Social Security imbalance: With the number of workers per beneficiary decreasing and the Social Security Trust Fund projected to run dry by 2035, incoming tax revenues will only cover around 83% of expenses, potentially leaving future generations, like Gen Alpha, with inadequate benefits
The number of workers supporting each Social Security beneficiary has significantly decreased, leading to an imbalance between revenues and benefits. With only 2.8 workers per beneficiary today, and this number expected to drop to 2.3 by 2035, the Social Security Trust Fund, which acts as an emergency fund during revenue shortfalls, is projected to run dry by 2035. This means that while benefits will still be paid, there won't be enough savings to cover the difference between incoming revenues and expenses. The system is not a pyramid scheme, but income inequality plays a role, as most income growth occurs outside the Social Security taxable limit. Experts estimate that incoming tax revenues will cover around 83% of Social Security's expenses, allowing for the payment of at least three-quarters of promised benefits through 2100. However, this may not be enough for future generations, such as Gen Alpha. It's important to understand the rules for calculating and receiving Social Security benefits, which vary based on retirement age and years of contributions.
Social Security Benefits Calculators: When comparing Social Security benefits using calculators, ensure they're adjusted for inflation and consider the impact of maximum benefits.
When comparing Social Security benefits using different calculators, it's crucial to consider if they're adjusted for inflation. Some calculators display the benefits in today's dollars, while others show the actual future benefits. For instance, a person born in 1994 with an $80,000 annual income and starting benefits at 67 would receive approximately $33,768 in today's purchasing power, but $41,868 if they wait until 70. However, the maximum monthly benefits, which are subject to inflation adjustments, are essential to consider as well. By using the official SSA.gov calculator, we can estimate that the maximum benefit after 2035 will be around $2,200 a month at 62, $2,900 at 65, $3,100 at 67, and $3,900 at 70. Reducing costs, like in business operations, is essential for increasing margins and investing in growth. NetSuite, a cloud financial system, can help businesses save on IT costs by consolidating multiple systems into one platform. Remember, adjusting for inflation and understanding the impact of maximum benefits are key when planning for your future Social Security benefits.
Social Security vs Investing for Retirement: For individuals retiring after 2035, Social Security may provide a competitive income stream, but this assumption depends on current funding rates and potential investment returns.
For individuals retiring after 2035, Social Security payments may provide a comparable or even more attractive income stream compared to investing the same amount for an average return and withdrawing at a 4% rate. However, this assumption is based on current funding rates and may not hold true if Social Security income averages decrease or investment returns increase significantly. For those unsure of how to account for potential Social Security income in their financial planning, considering inputting an estimate into their budget or retirement planning tools can help provide a clearer picture. Additionally, Betterment, an investing and savings app, offers advanced tools like automated rebalancing, dividend reinvestment, and tax loss harvesting to help individuals grow their money with minimal effort.
Social Security impact on retirement savings: Social Security benefits can reduce retirement savings timeline by up to 6 years for a couple with income of $100,000 and expenses of $72,000 per year, assuming an inflation-adjusted benefit of $4,000 per month. Ignoring Social Security income could result in oversaving by up to 30-40%.
Social Security benefits can significantly impact an individual's retirement savings goals. For a couple with a combined income of $100,000 and expenses of $72,000 per year, accounting for an inflation-adjusted Social Security benefit of $4,000 per month (representing 80% of the average benefit) shaved approximately six years off their estimated retirement savings timeline. This is because the Social Security benefit reduces the amount of income the couple needs to generate from their investments, lowering their overall savings requirement. It's important to note that the ideal savings rate for retirement is 40%, but this savings goal should not be confused with the total investment goal, which might be overestimated if Social Security income is not factored in. Ignoring Social Security income could result in oversaving by up to 30-40%. However, if an individual is planning to retire early or wants to ensure they have sufficient funds for retirement, their savings goal might still be accurate, but they may end up with more savings than needed once they reach their late 60s.
Retirement income sources: Relying solely on social security and potential inheritances for retirement income is risky, as many retirees currently live on less than half their pre-retirement income and a significant number retired earlier than planned. Focus on saving and investing for a secure retirement instead.
While social security payments and potential inheritances can provide financial support during retirement, they should not be relied upon as the sole sources of income. Many retirees currently live on less than half of their pre-retirement income, and a significant number retired earlier than planned due to circumstances outside of their control. The wealth transfer from baby boomers to younger generations may not be an equalizer as previously thought, as millennials in the lower income brackets are less likely to receive an inheritance. Instead, individuals should focus on saving and investing as much as possible to ensure a secure retirement. The idea of relying on historical average returns from the US stock market may not be a safer bet than the social security system, as both come with their own risks.
Multiple income sources, Social Security: Considering multiple income sources in retirement, including Social Security, can provide stability and diversification. Social Security acts as a foundation, while passive income from index funds can supplement.
Having multiple sources of income can be beneficial, especially in retirement. Social Security, while not the most exciting source of income, can provide a stable foundation. It's important to consider all options, including passive income from index funds, but be aware of potential drawbacks. Bill Perkins's "Die with Zero" mentality and the debate around index funds as a pyramid scheme are topics for further exploration. This week on The Money With Katie Show, we delved into the importance of diversified income streams and gained a new appreciation for Social Security. Tune in next week for more insights on personal finance. Our show is produced by Morning Brew, with Henevillez and Katie Yaddie-Tossan as hosts, and audio engineering and sound design by Nick Torres. Devin Emery serves as our chief content officer, and Kate Grant provides fact checking.