I'm 42 years old. So, it might seem like I have decades to plan for my retirement and figure out where Social Security fits in those plans. And you'd be right. However, it's never to early to start thinking about where your income will come from after you leave the workforce.
With that in mind, here's how I'm thinking about Social Security when it comes to my retirement plans, and why thirty- and fortysomethings might want to take a similar approach.
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How much Social Security will I get?
If you still have decades until retirement, there's no way to know for sure how much Social Security you'll get. Your eventual Social Security benefit depends on a combination of your highest 35 inflation-adjusted years of income, the annual Social Security taxable maximum, the benefits formula in place when you become eligible, and the age at which you start collecting your monthly checks.
Having said that, you can get a good estimate by checking your latest Social Security statement, which is available by creating an account at www.ssa.gov if you haven't done so already. You can see an estimate based on your actual work record, as well as other valuable information. Without sharing specifics of mine, I'll say that I check my Social Security statement every year and have a good ballpark idea of what to expect.
What will Social Security look like in 20-plus years?
Before we go any further, it's important to point out that any estimates you and I see are based on Social Security as it exists today.
You may have seen headlines indicating that Social Security is expected to run out of money by 2035. And it's true. Between now and then, one of two things will need to happen:
- Social Security benefits will be cut by a little more than 20% (this is unlikely). After 2035, all benefits will need to be paid from incoming tax revenue.
- Changes will need to be made to either increase Social Security's revenue (raise taxes) or reduce the amount of money flowing out of the program (cut benefits). Or a combination of the two.
Either way, it's fair to say that Social Security by the time I retire could look rather different than it does today. There's no way to know for sure what that means -- not yet, anyway. And there is no way to know if any changes would affect the retirement ages or benefits of people within a few decades of retirement.
How I'm planning for uncertainty
With the Social Security uncertainty in mind, there are a couple of important steps I'm taking to prepare. To be clear, I'm virtually certain that Social Security will exist in some form when I retire, but I'm planning as if I'll be relying exclusively on my savings.
- I'm saving aggressively in my retirement accounts. For me, this means my SEP-IRA, a type of IRA that is designed for self-employed people and small businesses. But depending on your situation, you might be able to increase your 401(k) contributions or open a traditional or Roth IRA.
- I'm also planning to completely pay off my home (whether it's my current one or wherever I'm living). Fewer monthly expenses means that I'll need less income from savings.
Here's the point. Even if Social Security gets fixed by Congress before it runs out of money, there's a strong probability that benefits could be significantly lower than they are today. For example, it's entirely possible that the full retirement age could be raised to 68, 69, or even 70.
So, I'm hopeful that Congress will preserve and protect Social Security, and that my eventual benefit checks are on par with what my latest Social Security statement indicates. But if they aren't, I'll be ready.
How will I spend my Social Security checks?
The bottom line is that I don't really have any grand plans for my Social Security checks after I retire. The short answer is that I'll likely use them to help cover my day-to-day expenses, healthcare costs, and other living expenses.
I have over two decades until I plan to start collecting benefits, and to let my investments compound, so I'm saving aggressively for retirement in the meantime. In a nutshell, I'm planning as if I'll be covering all of my expenses from my retirement accounts. With Social Security's uncertain future in mind, it would be a smart idea for workers in their 30s and 40s today to approach things with a similar mentality.
