Understanding Social Security in Your Retirement Plan
Social Security is a key government program that helps retirees. The program has been around for 90 years, but people worry about whether it will still be there when they retire. While Social Security matters, it's just one piece of your retirement plan. It's smart to understand how all parts of retirement planning work together to reach your money goals.
No matter if you're close to retirement or just starting your career, it's never too early to learn about Social Security. Understanding the program's past, current problems, and ways to plan ahead will help you make better choices.
How Social Security started
President Franklin D. Roosevelt created Social Security in 1935 during the Great Depression. It was meant to help older Americans who had little money. What started as a small program now supports millions of retirees, disabled workers, and their families.
Social Security works on a "pay-as-you-go" system. This means the money workers pay in taxes today goes to pay benefits for people getting Social Security now. The taxes you pay don't go into your own account for later - they pay for someone else's benefits right now.
This worked well when there were many workers for each retiree. In 1940, there were 42 workers for each person getting benefits. Today, there are only about 2.8 workers for each beneficiary. This number keeps getting smaller as more people retire and fewer babies are born.
People living longer creates challenges for Social Security
The Social Security trustees say the program's trust funds will run out of money by 2034. After that, the program could only pay about 78% of scheduled benefits using just the taxes coming in. The exact date might change, but the basic problem stays the same.
Some ideas to fix Social Security include raising the retirement age, increasing the amount of wages subject to Social Security taxes, or reducing fraud. But these solutions are hard to agree on politically.
Other countries have faced similar problems. Some European countries raised their retirement ages. Australia only gives benefits to retirees who don't have too much money or income already.
How to plan for retirement with Social Security uncertainty
Since we don't know exactly what will happen to Social Security, smart planning is important. Here are key things to think about:
When to start taking benefits: You can start getting Social Security at age 62, but you'll get less money each month. If you wait until age 70, you can get about 8% more per year after your full retirement age (between 66-67 depending when you were born).
Bridge strategies: Some people use money from their savings accounts to live on while waiting for higher Social Security benefits later. This can work well for married couples.
Taxes: You might have to pay taxes on up to 85% of your Social Security benefits, depending on your other income. Good planning can help reduce these taxes.
Don't count on it too much: Younger workers should build retirement plans that don't rely heavily on Social Security. Think of it as extra help, not the main source of retirement money.
Use tax-friendly accounts: Since Social Security's future is uncertain, it's even more important to put money in 401(k)s, IRAs, and HSAs (Health Savings Accounts). These accounts give you tax benefits.
Social Security has faced money problems before, and politicians still want to keep the program going. The smart approach is to not ignore Social Security completely, but also not count on it being exactly the same in the future.
The bottom line? Understanding Social Security's challenges helps you build a stronger retirement plan, no matter how old you are or what stage of your career you're in.
Want to learn how Keep It Simple Financial Planning can help? Please don’t hesitate to reach out here.