Will Social Security Be Around For Your Retirement?
July 15, 2013A few weeks ago, I wrote about the importance of completing a mid-year financial checkup. One of the activities that I completed as part our family’s recent financial checkup was the activity of running a basic retirement planning calculator (yes I do occasionally try to actually follow my own advice). I used both a basic retirement plan estimator and ESPLannerBASIC.
After about 15-20 minutes, the analysis confirmed that we are currently on track. But as with any financial calculator, it’s a “garbage in/garbage out” scenario and you want to be realistic with your assumptions for things like inflation, investment returns, and life expectancy. That’s why I try to run some worst case scenarios to look at the “what ifs” of our retirement plan.
One of those worst case scenarios that I ran included a calculation assuming that Social Security is not around at all. My result was that I could still retire but it would mean working a few years longer and reducing some of my desired lifestyle expenses. Another scenario included a reduction of Social Security benefits to 75% of my anticipated income based on my most recent statement. This retirement scenario revealed a more positive outlook. My plan was on track but I still decided to increase our long-term savings just in case Social Security benefits are reduced even more than expected over the long haul. That’s why simply running a retirement calculation is so important – whether you are on track or not you can make informed decisions as you decide how much to save for your life goals. (In case you’re curious where to find an estimate of your Social Security benefits, you can visit here: Social Security estimator — http://ssa.gov/estimator/.)
There is a widespread sense of concern as to whether or not Social Security will be around for future retirees. Many people that I am talking to lately in their 20’s, 30’s, and 40’s are not even bothering to include it in their retirement income projections. So with all of the doom and gloom scenarios that are out there regarding Social Security, should you even include it in your retirement income plan?
Generally speaking, yes. It’s true that there is definitely room for concern when it comes to the long term viability of Social Security benefits. Our national debt is approaching $17 trillion and the Social Security Administration itself recently released a report stating that without any changes to the system only 77% of current benefits would be able to be paid by 2033. But that doesn’t mean it’s going to disappear or go completely broke.
Baby Boomers shouldn’t have too much to be concerned about since the trust fund is not expected to run out of funds until somewhere around the year 2033. But even after that point in time, the payroll tax will still be around to pay at least 75% of anticipated benefits through 2087. Granted, that could change with our nation’s economy over the next 20 years and Congress may enact legislation to improve the outlook of Social Security.
I still personally believe that younger generations such as Generations Xers and the Millennials (Gen Y) will have Social Security to fall back on. The problem is deciding what level of benefit to expect and there are so many different variables that impact that figure. For example, even if we knew that the system was financially sound, your personal benefits are still based on lifetime earnings, how long you work, and the types of jobs available throughout your career. Projecting long-term benefits is simply an estimate based on the best available information. But, as it is with all estimates that involve our financial goals, it is essential that we use the most realistic assumptions as possible.
The downside of overestimating Social Security is that you may not be saving enough to reach your goals. This is more of a risk for younger generations than Baby Boomers. So my recommendation is to consider reducing your estimated benefits by at least 25% (50% if you are really pessimistic) if you are under age 50 to account for potential changes in Social Security. You may also want to plan for the real possibility that younger people may eventually see the full retirement age (currently 67) gradually rise over time.
The downside of significantly underestimating your Social Security benefit is that it may negatively impact your retirement outlook. My biggest concern is that Social Security’s struggles will discourage some members of younger generations to event attempt to plan for retirement or run a basic retirement calculation at all. But if this negative view helps you take a more proactive approach to saving for retirement and a greater sense of personal responsibility then excluding Social Security from retirement calculations isn’t necessarily a bad thing. However, you may end up working longer than needed or not fully utilizing your financial resources during your lifetime out of fear and anxiety.
Social Security is currently a major income source for 70% of current retirees according to a recent EBRI report. Confidence in Social Security may be going down, but many people are still relying on it being around in some fashion during their retirement. Just be sure to use some realistic estimates when you include it in your own retirement calculations to see if you’re on track to meet your goals.