Social Security is becoming a bigger concern for most Americans, with many starting to doubt that they'll receive benefits in retirement. Some of the most pessimistic forecasts might be overblown, but it's important to understand the forces that will shape Social Security in the decades to come. As you plan for retirement, consider the potential changes to federal benefits and how you can prepare to manage those changes.
Concern is growing about Social Security's future
According to research from the insurance carrier Nationwide, there's been a sharp increase over the past decade in the number of people over age 50 who think there's a chance that Social Security will run out of money in their lifetime. Even worse, those concerns have coincided with a decline in the number of households that expect to have their own assets in retirement accounts. This was largely driven by a decline in the prominence of defined benefit pension plans, though the outlook for 401(k) and IRA savings has also worsened.
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Younger generations are even less confident. Half of Gen Z respondents don't think they'll receive any retirement benefits from the program. Respondents recognize that the government must make some changes but aren't confident it will be handled effectively.
This is a worrisome combination -- too many people have no plan to be self-sufficient, while Social Security is being viewed as unreliable. Something has to change.
Things aren't quite as bad as many people fear
Concerns about Social Security are warranted, but the most extreme fears are probably overblown. The system is losing money, and the administration's current projections indicate that it won't be able to pay its full benefits starting in 2033. Fortunately, legislators are well aware of this issue, and lawmakers have proposed several plans to fix it.
There are a few different options to overcome the projected solvency issues. The program could increase its revenue by increasing tax rates or raising the payroll income tax cap. Alternatively, program expenses could be reduced by decreasing payouts, capping maximum benefits, or increasing full retirement age (FRA).
It remains to be seen which combination of measures will be enacted, and there will likely be some political conflict as lawmakers determine the solution. Nonetheless, there are several reasonable fixes that would preserve the Social Security system's funding for decades to come.
Becoming self-sufficient
Regardless of the eventual fix to Social Security, it's important for working-age people to take matters into their own hands as much as possible. If you can, build assets during your career and then have your own source of income in retirement. That removes the risk of being blindsided by any policy changes that could disrupt your financial plan down the road.
Saving is the first crucial step. Most people don't have a specific target savings rate in mind, which makes it difficult to set and achieve important financial goals. Households should try to retain 15%-20% of their annual income. If you can consistently save that much, you are likely to build enough assets to fund a comfortable retirement.
Families should set a budget that results in a 15% savings rate and do what they can to live by that. Monitor your spending with a budgeting tool to determine where your cash is going and how much you're spending on different categories. Some people can also increase their savings rate by taking full advantage of employer 401k matches if they aren't already. Others can benefit by splitting direct deposits into separate checking and savings accounts, ensuring a predetermined fraction of each paycheck is automatically retained.
There's also the matter of putting all those assets to work. Without investment growth, savings alone won't be enough to meet most people's retirement income goals. Investors should build a portfolio of stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other securities. This will generate a return on accumulated assets, expanding the pool of money to generate retirement income.
Long-term returns average anywhere from 8%-12% in the stock market, depending on the specific market index and the time frame. Your retirement plan shouldn't hinge on achieving returns that exceed that range, so don't let greed or unrealistic expectations skew your preparation and hard work.
Retirement portfolios should be heavily allocated to stocks during your younger years to optimize growth. Over time, retirement account allocation should shift toward bonds. Bonds typically provide a lower rate of return, but they are considered less risky because their prices don't fluctuate as much as stocks. A shift toward lower-risk assets helps to lock in your gains and eliminate the risk that an unexpected market downturn can wipe out your retirement funds.
You'll retire comfortably if you build enough assets to generate income. The 4% rule indicates that retirees can safely spend 4% of their assets each year without running out of money if they invest appropriately. Some financial planners have revised that number downward in recent years for a few reasons, but the logic is helpful for planning and goal setting. Whatever your desired retirement income might be, you'll need to amass 25 to 30 times that amount in assets. Keep that number in mind if you're trying to figure out how much you need to save for retirement.
If you can stay disciplined enough to do the above, you won't need to worry so much about the future of Social Security.
