What’s Up with Social Security?

On August 14, 1935, President Roosevelt signed into law the Social Security Act, which created this country’s first-ever social insurance program. Social security was intended to reduce the number of impoverished older Americans by providing retired workers age 65 or older with income for life. By any measure, the program performed well for the first eight decades. But there is uncertainty over what will happen as social security enters its second century of existence.
Based on current projections, the reserve trusts that funnel money into social security will run dry by 2035. When this happens, program costs will exceed income, so recipients will see a 20% (or greater) drop in benefits from what they are owed.
If you’re a Millennial reading this column, you may wonder why you should care about an event that will happen fifteen years from now while you’re still in the middle of your career. Here’s why:
  • That FICA deduction on your paycheck (6.2% of your first $137,000 in salary), plus an additional 6.2% paid by your employer, is your contribution to social security. You became a stakeholder in social security the day you received your first paycheck.
  • Over the last few decades defined benefit (DB) retirement programs, such as company-provided pensions, have been replaced by defined contribution (DC) programs like 401(k) plans. DB pensions provided retirees with stable and guaranteed income for life, regardless of how much or how little the employee saved on their own. The end of traditional pension plans represented an immediate loss of future financial stability for every working person.
  • The Federal Reserve’s 2018 Report on the Economic Well-Being of US Households found that almost 25% of US workers have no retirement savings or pension at all. Of those that who are saving, only 36% think their saving plan is on track. Some workers forego saving for retirement because they don’t feel capable of making long-term investment decisions, or they don’t expect to be financially able to retire.
 Millennials will range in age from about 40-55 if social security does indeed “run dry” sometime around 2035. At this point, the severe curtailment (or loss) of social security benefits will mean that Millennials will be the first generation in modern history to face retirement without the expectation of a government-provided financial safety net.
I’m honestly not trying to scare you – but I do want you to know why you need to take your financial future very seriously. And  there are things you can do today to get started:
  • One of the best ways to grow wealth over the long run is by investing in real estate. Over the last two centuries, 90% of all millionaires built their fortunes by investing in real estate! The current rule of thumb recommends that investors allocate somewhere between 25-40% of their total investment dollars in real estate, including their primary residence.
  • To ensure that you have the income you need in retirement, follow the 3% rule when investing. Calculate the annual income you will need to live comfortably after you retire, then divide that number by 3%. Put the resulting amount into an annuity to achieve your retirement income goal.
  • SIGN UP for an employer-sponsored DC plan, if you haven’t done so already. Start small – it’s OK to contribute just 1-2% of your pay into a relatively safe investment, like a money market fund. You will re-allocate your money elsewhere as you become more familiar with your options.
  • Already signed up? INCREASE your contribution by 1% each year.
  • If your company doesn’t offer a 401(k) or other plan, start an IRA. Workers under age 50 can contribute up to $6,000 into a traditional IRA in 2020.
  • Go to the AdvantaIRA website (advantaira.com) and set up an account for yourself. 
Lastly, pay attention to what Congress is doing about social security! Proposals to shore up the program include everything from increasing the amount of income subject to payroll taxes to increasing the age to claim full benefits. Set up a news alert using the key words “social security” to remain in the loop on this important topic.
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