For many retired Americans, Social Security is a vital source of income. What was once designed to be a supplemental income source for retirement has turned into a major income source for a bit more than 60% of all current retired recipients, per the Social Security Administration -- and that's not necessarily a good thing.
Social Security's woes could mean trouble for today's working Americans
According to the Social Security Trustees report from 2016, the Trust is expected to begin paying out more in benefits than it's generating in revenue by 2020, ultimately culminating in its $2.85 trillion in spare cash being exhausted by 2034. Should this cash be completely depleted, and if Congress were to enact no new laws to generate additional revenue, across-the-board benefit cuts could be needed. Those who depend on Social Security could find that their primary source of income has been slashed. In other words, relying on Social Security for retirement isn't such a hot idea.
If there is a silver lining of sorts for seniors, it's that Social Security can never go bankrupt since its primary source of funding is the payroll tax. As long as people keep working, the program will continue to collect revenue via the payroll tax. But it's also pretty clear that retirees may not be able to count on having Social Security in their corner as their parents' or grandparents' generation once did.
So what should you do in order to reach your retirement goal of living comfortably? Here are three money moves to consider making.
Budget now and for retirement
One of the smartest moves you should consider making while you're working is formulating a budget. According to a 2013 poll from Gallup, just 32% of all households kept a detailed monthly budget. Without a good understanding of your cash flow, it can be practically impossible to optimize your saving and spending habits. And with the average American saving just 5.3% of their income as of April 2017, per the St. Louis Federal Reserve, people could use all the help they can get when it comes to saving money.
The great news is that formulating a workable budget is easier than ever. Budgeting software can be found online, meaning no more mathematical addition and subtraction errors, and many of these tools can be found for free. In fact, if you have a monthly or annual saving goal in mind, most programs can help you formulate a plan of action.
Perhaps the tougher aspect of budgeting is sticking to your game plan. For this, you'll need to be proactive. Setting up a weekly, bi-weekly, or monthly automatic withdrawal into a savings or investment account is a great way to keep yourself honest to your budget and remove the "I forgot" excuse from the equation. Using cash instead of credit is another smart move, since the use of cash means the tangible loss of value when handing money to a cashier. Lastly, getting the people in your household, or close friends, involved in a budget can greatly increase your chances of success.
But there's more!
In addition to budgeting while working, you'll need to prepare a budget for your retirement. Chances are that your income will drop when you retire since you'll no longer have a working wage. It's therefore best to ease yourself into your retirement budget months or years in advance of your actual retirement date so you don't succumb to the sticker shock once you do retire.
A second smart move you can make if you don't think Social Security will have much to offer you when you retire is to invest wisely.
What do I mean by "invest wisely"? To begin with, I mean investing a reasonable portion of your nest egg in the stock market. According to a Gallup poll from April 2016, just 52% of Americans said they had money invested in the stock market, with a Bankrate survey in 2016 showing that only a third of millennials were investing in stocks. Though the stock market has had some pretty major fluctuations over the past two decades, it's also headed considerably higher over that time, meaning people who've chosen to stay out have missed out on big gains.
An analysis conducted by J.P. Morgan Asset Management of the S&P 500 (SNPINDEX:^GSPC) between Jan. 3, 1995, and Dec. 31, 2014, found that if a person bought and held the index for the entire 20-year period, he or she would have made an annualized 9.9%, or 555% overall. Mind you, this gain was made despite a peak 50% drop in the S&P 500 during the dot-com bubble and a 57% plunge during the Great Recession. The data unequivocally demonstrates that high-quality companies tend to gain in value over time. Historically, the stock market has gained about 7% per year, inclusive of dividend reinvestment.
However, by "invest wisely," I also mean invest for the long term. You might think you have the ability to accurately time the market, but it's just not possible to do over the long run. Missing out on even a handful of the best market days can really sap your market returns. Plus, as aggregated data from Yardeni Research has shown, of the 35 stock market corrections of at least 10%, when rounded, in the S&P 500 since 1950, each and every one has eventually be extinguished by a bull market rally.
The proof is in the pudding: Buy high-quality stocks and hang on to them for the long term.
Do some simple tax planning
Finally, consider doing some simple tax-planning in order to keep more of your money once you do retire.
Here's the thing about tax planning: You don't need to be a CPA to save money. For example, anyone is free to open a traditional or Roth IRA (certain income limits apply to a Roth IRA), and both have certain tax advantages to the accountholder.
A traditional IRA provides up-front tax breaks and allows your money to grow on a tax-deferred basis until you begin making withdrawals during your golden years. You will have to pay federal income tax once you begin making those withdrawals, but the current-year reduction in your tax liability could be a useful tool in helping you chip away at your debt levels. Entering retirement without any debt can be a major bonus.
A Roth IRA has no up-front tax benefits. However, since the money contributed to a Roth is considered after-tax, your account can grow tax-free for life. Considering that your Social Security benefits can be taxable at the federal level above a certain income threshold, having the ability to pull as much money as you'd like out of a Roth IRA after age 59 1/2 without any consequences to your annual adjusted gross income is a phenomenal perk.
Also, consider maximizing your employer-sponsored 401(k) if your employer offers a match. A matching contribution is essentially free money from your employer, and a 401(k) grows on a tax-deferred basis just like a traditional IRA.
It's also not a bad idea to consider where you're going to retire in advance. There are 13 states that may Social Security income, depending on your income level, and each state offers its own advantages and disadvantages when it comes to taxes.
Understanding your choices ahead of time can save you from unpleasant surprises later on.