Financial Wellness @ Work

4 Steps to Take Now so Tax Cuts Don’t Affect Your Retirement

Have you seen the news lately?  The president has announced his support of an extension of the Bush-era tax cuts, but there are some other tax cuts in the fine print that may hurt your retirement.  The proposed legislation includes a 2% reduction in Social Security taxes.  Say what?!?  Isn’t Social Security in enough trouble?  According to the Congressional Budget Office, Social Security expenditures have EXCEEDED tax revenue for the first time ever this year.  The fund itself is expected to run out of money by the year 2037.  So what can you do in response to this potential derailment in your future Social Security benefits?

Step 1: Increase your contribution to your own retirement plan

If your company offers a 401(k) or similar type of retirement plan, get involved right away.  If you are already contributing to it, increase your contributions by at least 2% to make up for the drop in Social Security tax.  If your company does not offer a retirement plan, put money into a traditional or Roth IRA each year.  Hey, let’s face it; you’ve never heard someone complain about saving too much, have you?

Step 2: Run a retirement projection

If you would like to maintain your current lifestyle throughout retirement, most financial planners suggest replacing at least 80% of your pre-retirement income (but if you are married to my wife, you better make it 100%).  Social Security is intended to replace some of it, but not all of it.  For most, Social Security will probably replace between 10-20% of their income, but that amount could go down with a drop in contributions.  According to our own research, only about 18% of employees are on track to replace 80% of their income in retirement.  Hopefully you are one of them, but if you’re not sure, take this opportunity to run a simple projection using this Retirement Plan Estimator.

Step 3: Review your investments for retirement

If your goal is to simply replace the 2% contribution into Social Security with a 2% contribution into your own retirement plan, then you may want to allocate this extra contribution to a safer, more conservative investment vehicle such as a government bond fund or a stable value fund.  However, if you are younger, and/or have the tolerance for more risk, this may be an opportunity to invest in a more balanced or more aggressive portfolio that has the potential to grow more than it would have grown in Social Security.  Just remember, Social Security is guaranteed by the government (for whatever that’s worth).

Step 4: Take your extra contribution as a lifetime income in retirement

Social Security is an income you cannot outlive.  That is not the case with most retirement plans.  If you spend too much of your retirement account too soon, you could eventually run out of money.  (Now why does that sound familiar?)  Some retirement plans offer the option to receive a monthly income for the rest of your life.  Consider taking some of your retirement account in this form.  If your plan does not offer a lifetime income option, consider rolling some of your nest egg to an annuity for this same purpose.

In the end, it is up to you and me as to what kind of retirement we enjoy.  Just between us, I think I rather like having control over this 2% that currently goes to Social Security tax.  As long as you act wisely with it, you might benefit from having control over it as well.

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