Will social security be there for you when you retire? Is it running out?!

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What is social security?

Social security unemployment family benefits isometric composition

Social security is a federal program run by the Social Security Administration that provides retirement benefits and monetary funds to recipients that qualify. It also offers disability and survivors benefits to qualified candidates and their spouses. The benefits are based on the age you retire and how many working years you completed. The program was established in 1934 by President Roosevelt and was designed as a safety net to support retirees. The primary goal is to provide financial security for retirees so they don’t have to worry about their financial future when they are unable to work.

How does social security work?

Thoughtful woman with laptop looking at big question mark

Social Security is ultimately a government insurance program. It is fully funded by taxpayers who have a social security deduction from their paycheck where they work and self-employed workers pay annually when filing their taxes. In 2022, the Social Security tax was 6.2% and 12.4% for self-employed workers. These contributions go to the Old-Age and Survivors Insurance Trust Fund for retirees and Disability Insurance Trust Fund for disability claimants.

Workers who pay Social Security for at least ten years are eligible for the benefits at age 62. Waiting longer to claim the benefits will result in your monthly benefits being higher. If you hold off until your full retirement age of 66 or 67, your benefits will be even greater.

After 67, your benefits will keep increasing until you reach the age of 70. However, the increase stops after that, and even if you postpone your retirement longer, it won’t affect your maximum benefits.

Two main factors impact how much you will receive:

  • The age you retire
  • Your average earning during your 35 highest-earning years

When average earning is calculated, it’s adjusted to reflect both the inflation and wage rate. So for instance, the pay you received ten years ago will be indexed to reflect what the same wage would be today. Since the highest-earning years are considered, individuals who make more money will get higher retirement benefits and individuals with lower pay will get lower retirement benefits. 

There are online tools to help calculate the estimated amount of social security benefits you will get in the future.

You’re also eligible for spouse’s benefits if they filed for the benefits and you are at least 62 years old. The maximum you can receive as a spouse is 50% of your spouse’s benefits and your work history will be considered when you apply for your spouse’s benefits. You will receive a higher amount if you’re eligible for higher benefits from your own work benefits. If it’s lower, you will receive spousal benefits. In the case of the death of the spouse, the family may still be eligible for survivor benefits.

Are your social security benefits at risk? 

Depressed sad man thinking over financial problems

One of the challenges with social security benefits is that the fund is running out due to many reading retirement age. This could potentially mean that by 2035, there would not be enough to cover full benefits for every individual that was eligible.

The number of retirees is continually increasing, and more Americans are claiming their benefits from social security at a faster rate than those the speed the fund is growing. Of course, it doesn’t mean the program will run out of money entirely.

Experts say there would be enough to cover about 78% of Social Security benefits for retirees. And the worst-case scenario is that retirees would be getting lower payments than were expected, but still receiving a portion of their eligible funds. That could be a big financial hit for many retirees who rely on this as their primary means of financial security.

So, what can be done to improve the social security fund? There are several options:

  • Increasing the payroll tax rate for current wage earners
  • Raising the retirement age to increase years required to pay into social security
  • Cutting benefits to current and future retirees

This has been a consistent topic in Congress and they will need to continue addressing this challenge to ensure people will receive their retirement payments.

The alternatives you have.

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Obviously, you shouldn’t solely rely on social security benefits you may or may not get in the future. So the best thing you can do is to be proactive and start thinking about your retirement as soon as possible. People in their 20s or 30s don’t often consider the importance of retirement planning, if at all. However, starting to save and invest early is the best thing you can do for your future. 

It’s crucial for you to have retirement savings even if you expect to receive some level of social security benefits. With all the investment options available today, it may be a bit confusing where you should start with a retirement plan.

For some individuals, it may be opening individual retirement accounts (IRAs) or enrolling in a 401(k) plan that is offered at your job, with possible matching of your contributions. It all depends on your current job situation, income, expenses and future goals.

Let’s look closer at some of the top options you should consider:

  • 401(k) or 403(b). Some employers offer enrollment in a retirement plan such as 401(k) or 403(b). If your place of work has an option like that and offers to match your contributions, you have to consider taking advantage of this type of savings. The main difference between 401(k) and 403(b) is the type of employer: profit organizations offer 401(k) and non-profit – 403(b). You can contribute to it as long as you work, and since the employer matches your contributions typically up to 5-6% (some employers even match 100%), that’s basically free money for you. You can contribute up to $20,500 annually and pay taxes in retirement when you withdraw money from your 401(k). The age you can start withdrawing is 59.5, so there are some restrictions, but this is a great option to consider.

 

  • Traditional Individual retirement account (IRA). This investment is not tied to your employer, but a type of investment you would need to contribute to annually on your own. Since this is not tied to your employer, your contributions will not be matched. You can typically contribute up to $6,000 annually, pay taxes later when you withdraw money in retirement and you can start withdrawing at age 59.5. Investing in this type of account makes sense if you want to have some savings outside your work plan and you think your tax rate will be lower in retirement since income would be much lower than your working years.

 

  • Roth IRA. This is similar to the traditional IRA, but there are some differences. With a Roth IRA, you pay taxes upfront and an income limit. To invest in Roth IRA as a single person, your income has to be less than $129,000 per year in 2022. If you’re married and file your taxes jointly, the total income has to be less than $204,000 per year in 2022. The maximum amount you can contribute per year is $6,000. It makes sense to open a Roth IRA account if you want to save outside your employer plan and expect you’ll be in a higher tax bracket in retirement.

 

  • Roth 401(k). The main difference between 401(k) and Roth 401(k) is that your taxes are paid upfront when you invest in Roth 401(k), and with traditional 401(k), you pay taxes in retirement. You can invest in Roth 401(k) as long as you’re working, and the maximum amount that can be funded annually is $20,500 in 2022. You can start withdrawing at age 59.5, and there are some penalties if you withdraw any funds before that age. 

 

When you decide on the type of retirement account you should open, there are pros and cons for each one of them. So when it comes to making a decision, you need to take a look at your current job and financial situation. If your employer offers matching contributions to a retirement plan, you should take it.

The main advantages of 401(k) are:

  • Easy to set up and maintain coming directly from your paycheck
  • Employer matches contributions in many cases
  • Contribution limits are higher than IRA’s

 

IRAs are the most common choice for self-employed and small-business owners. And with IRA, you’re definitely in the driver’s seat. So you can choose the bank or an investment firm to assist you in putting your money into an IRA. They also tend to provide more investment options than workplaces do.

The main pros of an IRA are:

 

You can also invest in both 401(k) and IRA if that makes sense for you. If you maxed out your 401(k), consider opening an IRA or Roth IRA as well. You can even open both if you qualify. However, the total amount you invest cannot exceed the $6,000 allowed.

As you can see, some issues with social security benefits may impact the retirees’ financial security, but it’s unlikely they will entirely run out of money. And according to experts’ predictions, there is still over a decade for Congress to take some action regarding Social Security benefits before any reduction in benefits would be required.

In the meantime, it is important to understand that relying solely on social security is not a sound strategy and may put your financial future in danger. Instead, you’ll need to save on your own in addition to social security income.

Here at Oak Harvest, we have retirement planners who can provide a comprehensive retirement plan to fit the needs of your current and future plans. We provide sound advice to ensure that social security is just ONE part of your retirement plan.

Book your call today to get started with a plan that will give you the confidence and security of your future!

Let Us Help You Achieve the Retirement You Deserve!

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