Gen Xers, Don’t Count on Social Security

“I don’t trust the government,” is a heck of a way to open a conversation, but that’s exactly how my client – I’ll call him Steve – put it during a recent meeting. Steve’s a good guy, he is in his late 40s, single, and is a foreman for a construction company just over the bridge. On the weekends he tools around on his 2017 Harley Softail and plays bass in a rock band. Steve is quite a character.

While Steve’s mistrust encompasses many areas of our government, our discussion focused on Social Security, something that’s been in the news more and more lately. Although Steve’s a couple of decades away from retirement, he’s trying to plan for his future, but the headlines Steve has seen online has him worried. He read that Social Security might “run out” before he is even retired.

Steve is not alone.

You see, if you’re like most Americans, Social Security benefits will be an integral part of your income during your retirement years. In fact, about 61 million Americans collected Social Security benefits last year, according to the Social Security Administration. Approximately 50 million of those folks collected either retirement benefits or survivor benefits.

The Social Security program is funded through the Federal Insurance Contributions Act (FICA) tax, a 12.4% tax on wages (up to a maximum of $128,700). You and your employer each pay half. If you are self-employed, you’re lucky enough to pay both sides.

Surplus money collected that isn’t paid out in benefits goes into the Social Security Trust Fund, which buys U.S. government bonds. For decades, that fund’s coffers have swelled. At present, the Social Security Trust Fund’s balance is around $2.89 trillion.

Despite that hefty balance, the Social Security Trust Fund is facing financial trouble in the long-term. We learn this from the Trustees of the Social Security and Medicare trust funds every year, in their annual report. The 2018 report says Social Security Trust Fund balances are expected to be depleted by 2034. What’s more, 2018 marks the first time since 1982 that the Social Security Administration will need to dip into the Fund to pay benefits.

Hmmm . . . The question Steve asked is, “Why?”

Well, our population is getting older, and Baby Boomers are retiring in record numbers. And people are living much longer in retirement than they ever have. As a result, fewer people are paying in to Social Security and more people are taking money out.

On the bright side, Social Security won’t suddenly stop paying out benefits in 2034. The program will continue to operate and will still receive revenue from payroll taxes and income taxes on benefits. But without reform or change, Social Security will continue to have to borrow from the Trust Fund to pay out benefits, and that fund will be depleted by 2034.

If that happens, the Trustees indicate that the program will be able to provide only about 77% of benefit payments because the revenue generated by the Social Security program won’t cover all of the program’s costs.

While 2034 sounds like a long time away, folks it is only 16 years. There’s enough time for the Wizards of Washington (WoW) to make changes to guarantee Social Security’s solvency for future generations. Actions have been proposed ranging from increasing FICA contributions, to reducing benefits, or raising the retirement age – or combinations thereof. Only time will tell what changes will be made to Social Security.

In 16 years, Steve will be 64, three years shy of his Full Retirement Age of 67. Steve hopes to still be working by then, and for even a few more years after that. Assuming the worst case – that Social Security will reduce benefits – Steve is worried about making ends meet in retirement.

Given the…insecurity…about Social Security, what can an educated investor like Steve do? Plan and Prepare.

So, here’s a chance for you to do some advanced planning that you may never need to use. Sharpen a pencil or open a spreadsheet and crunch some numbers to see how a reduction of Social Security benefits may affect your retirement plans.

If you’ve been assuming that you’ll work until your Full Retirement Age (FRA) – the date you can receive 100% of your Social Security benefits – you might want to rejigger your numbers to a lower benefit amount. As I noted earlier, the Trustees estimate that 2034 could see a benefit reduction to 77% of the anticipated benefit if no steps are taken to shore up the funds. So rather than assuming you’ll receive 100% of your Social Security benefits, use a more conservative 75% figure (or lower).

Steve doesn’t expect Social Security to be his only income in retirement, but it will be a significant source of income for him. He expects to receive about $1,400 each month if he works to his Full Retirement Age (FRA) (the age at which Social Security pays 100% of your benefit). $1,050 is 75% of that amount, a difference of $350. The average retirement length is about 18 years, according to the U.S. Census Bureau. That’s a cumulative $75,600 difference between what Steve has planned for and what he can anticipate if the benefits are reduced.

For Steve, the most sensible solution is to make incremental changes to his current savings and investment strategies. He decided to increase his 401(k) contributions to take full advantage of his company match and to fully fund a Roth IRA. Steve also decided to use an actively managed investment strategy rather than the traditional buy and hold for those accounts that he has control over, his taxable account and his new Roth. By making these changes and assuming a 6% rate of return, Steve projects he’ll have enough to cover what Social Security may not.

What do you need to do to close the gap? Like Steve, you may need to adjust your savings and investments accordingly – setting aside more for retirement and examining your current investment strategy.

When it comes to the future of Social Security, the sooner the WoW act, the better. But we can’t always count on them to do the right thing. That leaves it to us to be aware of what’s happening and to employ appropriate plans and strategies to make sure we’ve covered those contingencies. I always remember a quote from Archbishop Cardinal Cushing I learned in my youth, “You must always plan ahead. It wasn’t raining when Noah built the ark.” Folks, modest course corrections now may mean less drastic action later.

Be vigilant and stay alert, because you deserve more.

Have a great week!

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, a wealth management firm with offices is Falmouth, Duxbury, and Mansfield. Jeff can be reached at jeff@cutterfinancialgroup.com.

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