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Social Security benefits are one of the great unknowns when it comes to retirement planning. Baby Boomers dont have much to worry about since the Social Security trust fund isnt expected to run out of funds until sometime after 2027, but what about the younger generations? Should they be taking Social Security benefits into account when they formulate their retirement savings goals?
Even if Generation X and younger dont have access to full benefits, there will be some money left in the system, even if it means individuals receive 75 percent of their current expected benefits instead of 100 percent, said Robert Henderson, president of Lansdowne Wealth Management, LLC in Mystic, Conn.
What Is Social Security
When first adopted, Social Security covered about 60 percent of the work force. Over the years, it has expanded coverage to include the self-employed, many state and local government employees, federal workers and employees of nonprofit organizations. Today, approximately 95 percent of all workers are covered by Social Security.The program was designed to be a self-supporting federal program, financed with payroll taxes and providing not just retirement income, but a host of other insurance programs as well. There are four distinct types of benefits provided:
These benefits are financed by payroll taxes, broken into two components of “Social Security” taxes:
- Old Age, Survivor and Disability Insurance
- Medicare Hospital Insurance
Is There A Better Way
If you were to ask, Hey, do I really need to crunch a bunch of numbers to decide what to give to the Lord? my response would be, no, you dont. But if you want to use that approach because its consistent with your convictions and what youve done in the past, then I say go for it, even though I think there is a better way.
Some believers who want to honor the Lord by giving a tithe can get caught up in things like what exact percentage to give or whether the tithe is paid on gross or net income. However, as we mature in the faith, perhaps it should start to be more of a transition from percentages and calculations to a focus on the heart. Ultimately, we want to become cheerful givers where giving is done joyfully, worshipfully, generously, and consistently in response to all that God has done for us.
If you mostly align with the perspective on tithing number above, you could legitimately argue that any income you receive in retirement that you originally tithed on doesnt need to be tithed-on again. But to be consistent, you should also tithe on any new income beyond what you initially tithed-on, regardless of whether its from Social Security or the other sources of retirement income I mentioned.
If that is your position, I would have no problem with that. You can delay tithing until you have reached your break-even point, but keep in mind that by doing so, you also delay the joy and blessings of giving regularly.
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Who Will Be Affected The Most
Younger workers and individuals who earn more may be hit the hardest. These two groups contribute the most to the fund and could end up reaping the fewest benefits. However, even if the funds were to be depleted, the Social Security Trustees’ report noted, income would be sufficient to pay 78% of scheduled benefits.”
That said, if you are planning to retire in the upcoming decade, it is important to use the time you have left wisely. Boost your retirement savings as much as possible while also paying down debt and keeping expenditures low. Social Security payments alone will not cover an average mortgage or living expenses when you are saddled with debt.
How To Include Social Security Benefits In Your Retirement Plan
I dont have a crystal ball, so I dont know any more than anyone else about what will happen to Social Security over the next several decades. I cant give you a precise answer in terms of how much you should actually expect to receive in Social Security income.
But when I do retirement planning for my clients I calculate their full estimated Social Security benefit and then I assume that they will receive 50% of it.
Why 50%? Well to be honest its not incredibly scientific. But I figure that its a reasonable middle ground between the 74% you would get if absolutely nothing changes, and the much lower percentage you might get if there were drastic cuts.
And the good news is that that 50% makes a BIG difference in the amount you have to save for retirement.
For example, when I run the numbers for myself and my wife, including 50% of our estimated Social Security benefit decreases our target retirement savings by $585 per month! Thats real money that we can put towards other things like daycare, traveling to see family, and going out for ice cream.
To put it another way, completely ignoring Social Security might cause you to save a lot more for retirement than you have to. In some cases that might be a good thing, since it could mean that you reach retirement even sooner. In other cases it might create unnecessary stress on your budget and prevent you from doing things youd like to do.
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Don’t Rely On It As The Chief Way To Feather Your Nest
What will Social Security look like when you retire? Many Americans have lost hope that there will be anything to see. According to a 2021 Gallup poll, 43% of individuals surveyed said they worry a great deal about the Social Security system. The same survey also revealed that 38% of individuals said they believe Social Security is going to be a major source of their income in retirement.
So what will Social Security realistically look like in the future? Should workers be concerned?
Should I Include Social Security In My Fire Plan
When youre planning for FIRE, should you include income from Social Security in your projections? Well, today I aim to answer that question by talking about what I consider to be the worst case scenario: the Social Security Administration makes a unilateral cut to the benefit payouts.
I talk about how much that would be and why I think you should include some level of social security income in your retirement plan.
Additionally, I talk about the tax implications of receiving social security benefits while youve got other income, whether portfolio income or earned income. In 2019, if your combined income of 1/2 of the social security benefit and your other income sources is above $44,000, then 85% of your social security benefit can be taxed, at ordinary tax rates.
The math on that could look like this: $10,000 of social security benefits, 8,500 are taxable at 22%, or $1,870 in tax.
If youd like to dig into the details of your own situation, please schedule a call so we can get into the specifics together!
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Does 401k And Pension Affect Social Security
When you retire, you can collect both Social Security retirement benefits and distributions from your 401k simultaneously. The amount of money youve saved in your 401k wont impact your monthly Social Security benefits, since this is considered non-wage income. Thats $570 more than earned in early retirement.
A Brief Summary Of Tithing
Admittedly, tithing can be a controversial topic and hard to do justice to in a concise summary. If you ask several people about tithing, you may hear a variety of answers. So, I am going to boil it down to two main perspectives:
I am not going to debate the finer points of these two positions. But I can say that there are aspects of both that I would agree with.
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How Does Social Security Work
When you work, you pay taxes into the Social Security system, usually in the form of deductions from your wages and other earnings. Once you retire or are unable to work due to disability, you can apply for the benefits you’ve earned. The amount of your Social Security benefits will depend mainly on three things:
- the number of years you worked at Social Security-qualifying jobs
- how much money you made at those jobs, and
- the age at which you retire.
The longer you work — and the more money you make — the higher your Social Security benefits will be. Benefits don’t kick in automatically, though. You need to apply for your benefits through an application process. You must also accumulate the appropriate number of credits and reach the age of 62 before you can apply for any Social Security benefits. Your spouse, any dependent children, and eventually your survivors will also be able to receive your Social Security retirement benefits.
Consider Investing In Real Estate
If youre hoping for additional income streams in retirement, you may want to consider investing in rental properties. In addition to gaining equity in your property, youll also reap the benefit of additional income through monthly rent payments.
With that being said, its important to remember that being a landlord isnt for everybody. Youll have to deal with renters and set a budget for repairs. And in the worst case scenario, youll have to deal with personal drama, the mistreatment of your property, and possibly even the eviction of a tenant. But if you can handle it, the money youll earn can lessen your need to rely on your other retirement investments.
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How Much Social Security Will You Get When You Retire
The amount of your Social Security benefit is a function of your full retirement age. If you were born in 1960 or after, your normal retirement age when you are eligible to receive full or unreduced Social Security benefits is 67. When you choose to retire is central to your retirement planning strategy because it activates your various streams of retirement income: drawing upon Social Security and your pension, if you have one, as well as beginning withdrawals from your other retirement accounts, such as your 401 or IRA, and other possible income sources like annuities. With the right planning, you may be able to retire early and depend on alternative sources of retirement income until you reach your normal retirement age, at which point you can start collecting your full Social Security benefits. You also can increase your Social Security benefit amount by waiting beyond your full retirement age to retire. However, the benefit increase stops when you reach age 70. Access my Social Security Retirement Calculator to learn more.
Our Retirement Savings Calculator gives you the option of including your Social Security benefits in its calculations to determine if you have enough funds to retire. Discover how early retirement can affect your Social Security benefits and the truth behind some common Social Security myths.
Dont Sell Yourself Short
I completely understand all the reasons why you would be hesitant to count on Social Security. I felt the same way for a long time. Theres a lot of uncertainty around the program and it feels safer to just count it out.
But the truth is that Social Security is in much better shape than most people realize. And you can SIGNIFICANTLY reduce the amount you have to save for retirement by including even a conservative estimate of Social Security income.
So yes, in my opinion even young investors should count on Social Security. Not all of it, but enough to make a difference.
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In Your 20s: Cash In On Compound Growth
You should aim to save about 1x your salary
Yes, you’ve got a lot of competing goals and, yes, retirement is a long way off. Understood. But the powerful math of compound growth means this is the decade where what you manage to save can exploit compound growth to its fullest.
- Aim to save 10% of your gross salary pronto. That’s a minimum crank it up to 15% and you’re giving yourself a serious leg up. If you wait another decade to get rolling, you’ll need to save at least 20%.
- Focus on Roth options. Retirement accounts come in two flavors: traditional and Roth. The big difference is when you pay tax. At this life stage, when you’ve yet to hit peak earnings, saving in a Roth can be smart.
The Social Security Landscape For Current 25
If you’re decades away from retirement, this is where things get dicey in terms of your Social Security benefits. This is the primary focus of the current debate taking place on Capitol Hill. It is very likely that those currently entering the workforce will see a very different Social Security system than the one that’s in place now — absent some sort of drastic change in the numbers.
Unless changes are made, current 25-to-35-year olds face an over 25% reduction in benefits once the Social Security trust fund is gone. The response to this problem varies among politicians, educators, and economists. Some believe that though recovery will be slow, it will happen in time to fix the shortfall in the benefit system by the time this younger generation is ready to retire. Others warn that drastic reform must occur to prevent the inevitable bottoming out of the Social Security system.
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Social Security Is Not Enough For Retirement
Even if Social Security gets a huge makeover from Congress, workers should not consider the program as a sufficient retirement plan. Even now, Social Security barely covers living expenses for retired individuals.
According to the Social Security Administration, its programs were paying 65 million Americans $1,096 billion in combined benefits at the end of 2020. This might seem like a lot, but break down those numbers: Retired individuals receive $1,555 per month, on average, and disabled individuals are earning $1,280 per month. Individuals who exist on Social Security benefits alone don’t live far above the poverty line, which is roughly $1,132 a month for a single person in 2022.
Heres How Retiring Early Affects Your Social Security Benefits
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Our familys goal was to achieve financial independence assuming we will have no Social Security benefits. Our full retirement ages are over two decades away, and cuts to the program seem likely. We decided to consider any benefits we may receive as a bonus and havent paid much attention to Social Security.
I recently shared that Ive been helping my parents with their finances as they transition into retirement. Seeing how valuable their Social Security payment is has been eye-opening.
With a paid-off home and cars and a lowtax-burden in retirement, they live a comfortable lifestyle withmost of their expenses covered by their Social Security benefits and a verysmall pension.
They need little moneyfrom their investment portfolio. This means they could have saved substantiallyless and retired sooner or spent substantially more on the way to retirement.
Seeing this made merealize that ignoring Social Security can be an expensive mistake. So I soughtout to answer three questions:
How you accumulate Social Security benefits
SocialSecurity calculates your benefit based on the average of your highest 35 yearsof earnings. You must have at least 10 years of earnings to qualify for SocialSecurity retirement benefits.
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Your Early Retirement Options
If you take early retirement, your monthly benefit is reduced depending on the number of months between your early retirement and your normal retirement. The maximum reduction is currently set at 30 percent. The following table can be used to calculate how early retirement will affect your monthly benefit.
|How Early Retirement Will Reduce Monthly Benefits|
Can I Collect My Retirementbenefits Early
You can start collecting Social Security as early as age 62 but theres a catch. If you collect before you reach your full retirement age , youll receive a lower monthly payment permanently. For example, if your FRA is 67, but you begin to claim benefits at 62, youre signing up to get 30% less. However, this reduction will decrease for each month you wait after age 62, up until your FRA. Think of your FRA as your break-even point.
Age to receive full Social Security benefits2
65 + 2 months for every year after 1937
66 + 2 months for every year after 1954
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