Social Insecurity – How You Should Plan Ahead

So far, we have seen two debates that have covered a wide array of political and economic issues.  Unfortunately, there is one substantive topic neither candidate was eager to discuss – Social Security. 

As the nation’s largest domestic spending program, and considering the amount of tax collected by our government, one would hope that Social Security would remain solvent and achieve its intended purpose.  Unfortunately, this is not the current trend.  According to the Social Security Administration, the trust funds serving retiree and disability benefits will be depleted by 2034.  Of course, that is assuming the trust funds actually exist.

To restore Social Security, lawmakers would have to choose among the following options:

  • Reduce benefits – certainly the least favored option amongst current and pending retirees, perhaps the most active voting block.

  • Increase taxes – strictly opposed by both Corporate and Main Street America, this would likely entail an increase in payroll taxes assessed to both employers and employees.  The Bipartisan Policy Center recommends an increase from 6.2% to 6.7% as well as increasing the cap on earnings subject to social security taxes.

  • Increase the retirement age – this is not exactly music to the ears of American workers. The AARP suggests immediately increasing the age from 66 to 68.

The most recent notable effort to reform the program was put forth by President George W. Bush in 2005.  After his re-election, President Bush spent a great deal of time and political capital only to be completely disregarded by an anxious congress.  Sensing that the Washington will only act in the event of an immediate financial crisis, American taxpayers are left to their own devices to calculate what, if any, Social Security benefits they might receive during their retirement. 

Here are some strategies you should consider:

  • Assume you will receive no Social Security benefits whatsoever – in assisting my clients with constructing their retirement plans, we generally exclude both inheritance and social security.  With both a reasonable annual income and retirement expectations, an impressive nest egg can be constructed within 20-25 years of advanced planning

  • Alternatively be conservative with your calculation of Social Security benefits:

  1. The SSA offers a quick calculation of benefits – for general planning purposes, considering significantly discounting the benefit. https://www.ssa.gov/oact/quickcalc/

  2. Presently, the tax treatment of social security benefits depends upon your total income.  For safety, assume all future benefits will be fully taxable.

  • Diversify your retirement income sources:

  1. Maximize retirement plan contributions – at the very minimum, you should contribute up to the amount of your employer match.  Ideally, you should contribute the maximum amount each year. 

  2. Utilize both Traditional and Roth IRA’s – even if you have an employer-provided retirement plan, you can still make IRA contributions.  Ask your financial advisor about the opportunities to convert Traditional IRA’s to Roth IRA’s.  Having both will help to generate withdrawal options and strategies during your retirement.

  3. Build a health care reserve – HSA plans allow for families and individuals to build a cash reserve for medical expenses.  Having a reserve of this kind can serve you very well during your retirement years, by which time, health care expenses could be astronomical.  Additionally, these plans may also offer significant tax planning benefits.

When I was a child, there was a nearby intersection notorious for requiring great care and caution when traversing.  I asked my father if the town should install a traffic light and he said “They will…after a major accident.”  Unfortunately, he was correct.  Let’s hope that Washington can restore Social Security before a crisis occurs.