I was talking to a friend recently about retirement savings, and he mentioned that his 401(k) balance probably leaves much to be desired. That surprised me, because he earns a decent income and doesn't strike me as the type to spend lavishly.
He then explained that it's not like he can't increase his retirement savings rate -- he simply feels he doesn't need to. When pressed further, he explained that his plan is to own a couple of income properties in retirement (he already owns two now) and live off that money plus his Social Security benefits.
The former is a solid plan. But the latter is a bit more questionable.
The truth is that a lot of people are counting on Social Security to cover their senior living costs. But I'm banking on my personal savings instead.
Social Security could fall short
I'm thankful to earn a decent income -- one that allows me to comfortably cover my bills. But because of that, I know that Social Security will only replace a small portion of my earnings, even if I manage to snag a higher-than-average benefit. And so that's one reason I'm not depending too heavily on Social Security for retirement.
The other reason is that Social Security cuts are a real possibility. The program is facing a serious financial shortfall, and while lawmakers have proposed different solutions to pump more money into the program, most of them have blatant drawbacks.
One idea, for example, is to raise the wage cap at which Social Security taxes apply to earnings. Doing that would increase the program's revenue, but it would also then create a scenario where higher earners have to be paid a larger benefit in retirement, thereby putting Social Security back at square one.
Because Social Security may be slashing benefits before I retire, I have to assume I won't get very much income from the program. So, rather than depend on it, I have to depend on myself -- or, rather, my savings.
These days, I make it a point to max out my retirement plan contributions. Since I'm self-employed, I can fund a solo 401(k), which lets me contribute more than a traditional 401(k). I also invest in a regular brokerage account, largely to get some added flexibility with my money.
My goal is to land in a situation where I really don't need Social Security at all to cover my living expenses, and so any money I get from the program is gravy. To be fair, I also plan and hope to work in retirement, largely because I'd imagine I'd get extremely bored without some sort of job as an anchor. But between those income sources, I want to create a situation where I don't have to stress about Social Security benefit cuts or changing rules or cheap cost-of-living adjustments.
Take control of your retirement
The friend I was talking about earlier? I advised him to ramp up his 401(k) contributions in light of Social Security's pending revenue shortfall, which he was actually unaware of. Between a more robust nest egg and ongoing revenue from the properties he owns, he'll hopefully be all set.
Meanwhile, if your plan is to count on Social Security as a major source of retirement income, you may want to rethink it. This isn't to say that the program will pay you nothing, and that you should write off those benefits completely. But ideally, you should aim to get to a place where a major cut to your benefits won't affect your ability to maintain a comfortable lifestyle.