Should I Include Social Security In Retirement Planning


The Uncertain Future Of Social Security Benefits Could Impact Your Retirement Plans

Should Doug Pull From His 401k Or Take Social Security Early

By Bethany K. Laurence, Attorney

If you’re like most Americans, Social Security is a key part of your retirement plans — around 96% of the workforce is currently covered by some sort of Social Security plan. But the current economic downturn has many people seeing an increasingly uncertain future for their Social Security benefits.

This article describes how the Social Security benefit process works and explains how your Social Security benefits might be impacted by funding shortages.

I Think Benefits Will Be Available In Some Form But Im Not Relying On Them For The Bulk Of My Income

At some point in my young adulthood, I became aware that many millennials were skeptical that Social Security would still be paying benefits by the time we retire. Curious whether that sentiment still stands, I recently posted to my Facebook page to ask my generational cohorts whether theyve absorbed a similar message and how theyre incorporating Social Security into their retirement plans. Many respondents said that they arent counting on Social Security to be around in a few decades and that to stay afloat, they expect to tap their own investments in 401s and IRAs, brokerage accounts, and real estate.

In reality, Social Security is not doomed. Much of the anxiety surrounding its future stems from projections that if Congress takes no action, Social Securitys trust fund will run out of money in 2035. But even if that happens, Social Security will be on track to pay out 80% of scheduled benefits from payroll taxes. Whats more, lawmakers are likely to shore up the program, although it may be at the last minute. Strategies may include increasing the percentage taken out of workers checks for Social Security payroll taxescurrently, its 6.2% for employeesor boosting the amount of income subject to payroll taxes. Other ideas include raising the age of full retirement and changing cost-of-living adjustments so that they result in smaller benefit increases.

What Is Retirement Planning

Retirement planning determines retirement income goals and the actions and decisions necessary to achieve those goals. Retirement planning includes identifying sources of income, sizing up expenses, implementing a savings program, and managing assets and risk. Future cash flows are estimated to gauge whether the retirement income goal will be achieved. Some retirement plans change depending on whether youre in, say, the United States or Canada, which has its unique system of workplace-sponsored plans.

Retirement planning is ideally a lifelong process. You can start at any time, but it works best if you factor it into your financial planning from the beginning. Thats the best way to ensure a safe, secureand funretirement. The fun part is why it makes sense to pay attention to the serious and perhaps boring part: planning how youll get there.

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Is There A Better Way

If you were to ask, Hey, do I really need to crunch a bunch of numbers to decide what to give to the Lord? my response would be, no, you dont. But if you want to use that approach because its consistent with your convictions and what youve done in the past, then I say go for it, even though I think there is a better way.

Some believers who want to honor the Lord by giving a tithe can get caught up in things like what exact percentage to give or whether the tithe is paid on gross or net income. However, as we mature in the faith, perhaps it should start to be more of a transition from percentages and calculations to a focus on the heart. Ultimately, we want to become cheerful givers where giving is done joyfully, worshipfully, generously, and consistently in response to all that God has done for us.

If you mostly align with the perspective on tithing number above, you could legitimately argue that any income you receive in retirement that you originally tithed on doesnt need to be tithed-on again. But to be consistent, you should also tithe on any new income beyond what you initially tithed-on, regardless of whether its from Social Security or the other sources of retirement income I mentioned.

If that is your position, I would have no problem with that. You can delay tithing until you have reached your break-even point, but keep in mind that by doing so, you also delay the joy and blessings of giving regularly.

How I’ll Plan For These Changes

Should You Include Social Security When Doing Retirement ...

What this ultimately means is that I need more money saved. But saving for retirement can already be a big goal and coming up with extra each year could be challenging. That’s why I plan on investing my money so that I get some growth from stock market appreciation. Combined with having time on my side, this can help make it a lot more manageable. There’s no way of telling if my future payments could get cut or by how much. But I can come up with some possible projections and pick one that is most attainable for me.

For example, if I estimate that I’ll need $12,000 in extra income each year, using a 4% withdrawal rate, I’ll need an extra $300,000 by the time I retire. If I can save $1,650 more each year for the next 30 years and earn 10% each year on average, I can accomplish this. If I think that I’ll only need $6,000 more each year, then I only need $150,000 more which would require $850 each year over the next 30 years if I earned a 10% average interest rate. Historically, I could’ve earned this rate of return with a portfolio of 100% stocks .

As more is known about the future of Social Security, I can make tweaks in my plan. Or as I get older and my risk tolerances change, I may decide I want less aggressive assets, which will reduce the rate of return that I earn. I can accommodate for this adjustment by either accepting a lower amount of money saved or increasing my annual contributions.

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Brief History Of Social Security

The Social Security program was created by the Social Security Act that President Franklin D. Roosevelt signed into law in 1935. The first checks went out in 1940. Originally it paid benefits only to workers 65 and older, but in the 1970s the government altered it to allow workers to claim benefits as early as 62. It also instituted annual cost-of-living adjustments to help Social Security keep pace with inflation.

The program has worked fairly well so far, but many people fear for the future, when there will be fewer workers to support a greater number of Social Security recipients. The latest Social Security Trustees’ Report indicates the program’s trust funds would be depleted by 2034, after which it would be able to pay out only about 76% of benefits to retirees and about 92% to disabled workers.

The government has proposed several possible solutions for ensuring the long-term sustainability of the program, but at present no plans have been set. There’s no risk of the program disappearing in the next decade or two, but it’s possible future benefits may not go as far as they do today. That’s why today’s workers need to prioritize their personal retirement savings, so they can cover most of their expenses on their own.

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Medicare Premiums Come Out Of Your Social Security Checks

Many seniors have Medicare premiums automatically withdrawn from their Social Security checks, and this is yet another instance where you don’t want to be caught by surprise with benefits lower than you thought they would be.

Unfortunately, healthcare inflation tends to increase more than the periodic Social Security Cost of Living Adjustments . While there are rules in place to prevent Medicare premiums from rising more than the annual Social Security benefit increase, there are many years when seniors see hardly any extra money in their checks, because their entire benefit bump is eaten up by rising Medicare costs.

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Who Will Be Affected The Most

Younger workers and individuals who earn more may be hit the hardest. These two groups contribute the most to the fund and could end up reaping the fewest benefits. However, even if the funds were to be depleted, the Social Security Trustees’ report noted, income would be sufficient to pay 78% of scheduled benefits.”

That said, if you are planning to retire in the upcoming decade, it is important to use the time you have left wisely. Boost your retirement savings as much as possible while also paying down debt and keeping expenditures low. Social Security payments alone will not cover an average mortgage or living expenses when you are saddled with debt.

A Potentially Lower Payment Formula

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Currently, your standard benefit is determined by the number of years that you worked and the amount of money that you made in each of those years. You qualify when you earn 40 work credits, which is the equivalent of about 10 years of working, but up to 35 years of working years can go into this calculation. The more of them you work, the higher your payment could be. And while you only need $1,470 in earned income for a credit, the higher your income, the more your benefit could be in the future.

Making up for gaps in funding with Social Security could also be accomplished by changing this formula so that it yields a lower monthly payment. For the average worker, Social Security will make up about 40% of their working income. If you earn less than the average worker it could make up a higher percentage but if you earn more, it could make up less. If this type of change happened, Social Security could make up an even smaller percentage of everyone’s pre-retirement income.

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When You Claim Matters

If you claim your Social Security benefits before your FRA, or full retirement age , you will end up with a permanently reduced monthly benefit because of the early age. If you claim at the earliest possible age of 62, your monthly checks could be up to 30% less than at your FRA.1

There will also be an earnings test until you reach that FRA: If you have earned income in excess of $19,560 in 2022, your benefits will be reduced by $1 for every $2 of earned income over the limit.

In the year of reaching your FRA, the earnings test limit is $51,960 in 2022, and your benefits will be reduced by $1 for every $3 of earned income over the limit.

These benefits are not truly “lost,” however. If your benefits have been reduced due to earning, your monthly Social Security check will be increased after your FRA to account for benefits withheld earlier due to excess earnings. Note that “earned” income includes wages, net earnings from self-employment, bonuses, vacation pay, and commissions earnedbecause they’re all based upon employment. Earned income does not include investment income, pension payments, government retirement income, military pension payments, or similar types of “unearned” income.

Once you reach your FRA, there is no earnings test and no benefit reductions based on earned income.

Scenarios: Claiming Social Security at 62 while working

If You’re About To Apply For Social Security Retirement Benefits

If retirement is right around the corner, you probably have nothing to worry about when it comes to your Social Security benefits. The problems described above are highly unlikely to affect current retirees or even those who plan to retire in the next ten years. The SSA has also stated that it has no plans to cut current benefits.

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A Brief Summary Of Tithing

Admittedly, tithing can be a controversial topic and hard to do justice to in a concise summary. If you ask several people about tithing, you may hear a variety of answers. So, I am going to boil it down to two main perspectives:

  • Tithing is still for today. It is a Biblical mandate, or at a minimum, an important Biblical principle that all Christians should follow. Tithing, which is defined as giving ten percent of your first fruits , is a Biblical mandate, or at least an essential Biblical principle, that was instituted in the Old Testament and never repudiated in the New Testament . Therefore all believers are expected to tithe as a nominal part of the Christian life. .
  • Although tithing was never explicitly repudiated in the NT, it has been replaced by a new and better pattern of giving under the New Covenant. Tithing should not be viewed as a command since we are no longer under the OTs legal demands. The Bible teaches that God owns everything, and we are simply managers. God has entrusted his riches to us therefore, we are obligated to manage whatever resources we have for the advancement of his Kingdom. According to NT teaching, that should include generous, even sacrificial giving, which may be more or less than the OTs ten percent tithe. Everyone is free to give as they feel led by the Holy Spirit.
  • I am not going to debate the finer points of these two positions. But I can say that there are aspects of both that I would agree with.

    Tithing On Other Retirement Income

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    In addition to Social Security, you may also have income from a pension, annuity, or withdrawals from retirement accounts such as 401/k, 403b, IRAs, SEPs, etc. Each of these is a little different.

    Pensions. Although they are increasingly rare, if you receive a pension, either as a lump sum or as a lifetime annuity, and did not contribute anything to it, then it should be treated as a new income stream in retirement that you have not tithed on. If you did make contributions to it, then it looks much like the employee Social Security scenario I discussed above, i.e., some of what you receive has been tithed-on, and some have not.

    Annuities. These are trickier. All annuities, regardless of type, are funded by either a lump sum payment or a series of payments over time . Once you start receiving payments, it looks almost exactly like Social Security or a pension. If the money used to fund the annuity has already been tithed-on, you would only tithe on it once you have received back the full amount you paid. Typically, that break-even period will be much longer than with Social Security because the payouts are lower, especially in a low-interest environment like we have today.

    An IRA looks much like an annuity in the sense that you contribute to it, it grows , and then you take the money out in retirement. If you had tithed on your IRA contributions , you would not tithe until you had taken out all the pre-tithed-on contributions.

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    Why Social Security Shouldnt Be A Part Of Your Retirement Plan

    Your retirement plan is likely to have a number of different savings and income components. For example, you may be fortunate enough to have a defined benefit pension plan through your employer. You may also have a 401 account through past and present employers, as well as Roth and traditional IRAs. You may even have annuities and one or more life insurance policies with an investment feature.

    Notice that the list above does not include an income source that many people would first think of when they consider retirement the federal Social Security program. It would be prudent, however, not to include any future Social Security benefits in your retirement plan, especially if your under 40 years of age.

    Here is some retirement advice and some important reasons why Social Security should NOT be the foundation of your retirement plan.

  • Future Benefits are Uncertain. As the first of the baby boomers start to enter retirement, there will be a significant stress on the Social Security system. While the calculations and analysis of how much money future retirees will be able to receive in benefits are subject to much debate, an objective examination of the mathematics behind the program reveals that at some point within the next few decade there will almost certainly be problems in paying the same level of benefits as the program now pays. Its quite possible that the amount of benefits for future retirees will have to be reduced.
  • Coordinating The Value Of Social Security With Other Retirement Assets

    Notably, the factors that drive the value of Social Security also have an impact on the other assets in the retirement portfolio. As shown earlier, at higher interest rates, the asset value of Social Security is actually lower however, when returns are higher, the value of the rest of the retirement portfolio may be greater! In other words, Social Security provides a unique form of asset to hedge against the rest of the portfolio, because its an asset whose value increases as returns decrease!

    Similarly, while the value of Social Security has been calculated here based on average life expectancy and average inflation assumptions, the reality is that the value of Social Security will increase further for those who live beyond life expectancy, and will rise substantially if inflation turns out to be higher . For instance, if you live to age 95 and inflation turns out to be 5% instead of 3%, the value of an average Social Security benefit is actually a whopping $717,000 !

    So what do you think? Have you ever included the present value of Social Security benefits as an asset on the clients balance sheet? Would doing so make it easier to have the conversation about when/whether its best to delay Social Security benefits? Does this provide you with a different perspective on how to think about the value of Social Security?

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