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3 Surprising Reasons Social Security Is Vital to Your Retirement Dreams

By Dan Caplinger - Sep 21, 2015 at 6:40AM

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The program is a vital source of retirement income, but it's more than just that.


Source: Flickr user Kdothq.

Social Security is one of the most important government programs for Americans, with tens of millions of retirees collecting benefits after the end of their careers. More than half of married couples and almost three-quarters of single retirees get the majority of their income from Social Security, and Social Security makes up 90% or more of the total money coming in for nearly half of unmarried retirees .

Yet the importance of Social Security goes beyond simply paying money to retirees. Below, you'll learn three often-overlooked aspects of Social Security that make it even more valuable in bringing you financial security than many realize.

1. For many, Social Security is the only defense against longevity risk.
The key to financial security in retirement is having enough money to last as long as you live. Yet as much as many people try to save up a retirement nest egg for their golden years, the risk of outliving your money is hard to overcome. Because investment accounts are vulnerable to market downturns, you can never be certain whether your retirement savings will last long enough to endure inevitable bear markets while still affording you the standard of living you want.

In that light, Social Security is a valuable asset because it guarantees payments throughout your lifetime, no matter how long you live. Given that most people no longer have employer pensions that have similar features, Social Security is often the only dependable source of guaranteed monthly income. Although you can duplicate such income streams with insurance products like annuities, having Social Security available often gives the right amount of exposure in handling longevity risk and ensure a source of income that will last as long as you do.

2. Social Security can give you flexibility to be more aggressive in your investments.
Among financial planners, there's some debate about how to treat Social Security as part of an investment portfolio. Some simply take it out of the equation entirely, treating it as an outside source of income and advocating asset allocations that don't take it into account. Others, though, advocate treating Social Security like a bond investment, given that it provides regular income the same way that fixed-income securities do and that it's guaranteed by the federal government, at least to the extent of its funding.

In particular, Vanguard Group founder Jack Bogle has argued in favor of treating Social Security like a bond investment for purposes of allocating the rest of your portfolio, arguing that you can take more risk in buying stocks with the remainder of your savings if you know that Social Security will offer you the monthly income you'd otherwise need to get from bonds. That's an aggressive view, and few people are willing to give up their other fixed-income assets to rely entirely on Social Security. However, for those who feel the need to have their investments grow more quickly, having Social Security benefits as a backstop can free you to be more aggressive in your investing strategy.

3. Social Security can guide family career decisions.
Social Security is a key part of every worker's financial planning, but the program is extremely unusual in that it also plays a vital role in the planning decisions of family members as well. In particular, spousal Social Security benefits can guide married couples toward certain lifestyle decisions that they might see as improving quality of life.

The best example of this is in the spousal and survivors benefits that spouses are entitled to receive based on a worker's earnings history and how they can encourage families to consider adopting a one-earner household strategy. By getting as much as 50% of retirement benefits in the form of spousal benefits, as well as full survivors benefits after the worker's death, spouses are better able to consider unpaid stay-at-home arrangements while still having a reliable source of retirement income.

Similar factors exist in other family situations, including the early death of a parent or families with disabled adult children. Overall, Social Security goes well beyond the simple retirement benefits that so many people focus on, and families look to the program as they consider major decisions that go beyond their financial lives.

Social Security pays income that millions of retirees depend on, but the true value of the program goes beyond simple cash payments. By ensuring payments for life, Social Security can have a big impact on the rest of your investing strategy as well.

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