Bridging the Gap Between Social Security and Retirement
August 31, 2011Social Security has just released its Fast Facts and Figures About Social Security, 2011, and let me just say, the numbers aren’t pretty. For years the Social Security Administration has been telling us that the trust fund is running out of money. The last I heard, there is only enough money to pay full projected benefits until around the year 2037, but despite this, there are still way too many people who rely, way too heavily on Social Security as a primary source of income in retirement. According to Jason Fichtner, Ph.D. (as cited by Robert Powell in his column titled Social Security: A Little Light Summer Reading), “66% of all beneficiaries now rely on Social Security for 50% or more of their income in retirement, while 35% rely on benefits for 90% or more of their income.” Given the fragile state it is in, future retirees need to look at Social Security a lot differently.
Social Security was never intended to be a primary source of income for retirement. In fact, when it was first established in 1935, the average life expectancy was only 61.7 years. Back then you were not eligible to collect benefits until you reached 65. There have been changes made along the way, including the addition of reduced benefits starting at age 62, but only recently has the age for collecting full benefits been increased, despite decades of increasing life expectancy. Because of this, and other factors such as population growth (can you say “baby boomers”), the chances that Social Security will remain a viable source of income in retirement continues to dwindle.
Reduce your dependency
The best thing future retirees can do today is to simply save for their own retirement. There are a number of different ways to figure out how much you would actually need to save by the time you retire, so start by determining your magic number (see my blog post on August 10, 2011), and then begin contributing to a retirement account. (Click here for help figuring out which retirement account is right for you.)
Insure your income
One of the greatest benefits of Social Security is the guarantee of a lifetime income. If your company offers a pension benefit, you may already have this as a reliable source of income, but if not, consider using part of your retirement assets to purchase an annuity. An annuity, by its simplest definition, provides a guaranteed income for as long as you live. While it may be tempting to use all of your retirement assets to purchase an annuity, keep in mind that once the annuity is purchased and you begin receiving an income, you can’t change your mind. Most financial planners suggest maintaining a portion of your retirement assets in an account you can access as needed. I personally like the idea of having 50% of my income from guaranteed sources, and drawing the other 50% out of a retirement account.
Protect your plan
Even the best laid plans can be knocked off track because of an unexpected injury, illness, or even death. One of the lesser known elements of Social Security is the availability of benefits for disability and survivorship. Unfortunately, disability benefits are hard to qualify for (you must be completely disabled, unable to perform any work), and survivorship benefits may not provide sufficient income for your dependents. As such, it is just as important to maintain adequate disability and life insurance as it is to save for retirement. If your employer offers these benefits at work, take advantage of them. If not, contact an insurance professional and review your need for coverage.
Just because the government may have been short sighted, doesn’t mean you have to be. I personally believe Social Security will be around in one form or another, but if we rely too heavily on if for our retirement income, we may not be in a position to enjoy the retirement we were once looking forward to. 🙂