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Amid the uncertainty surrounding Social Security, here’s what financial advisors are telling clients
Social Security is not shaken, but it is unstable.
The new report on Social Security, which predicts that the combined retirement and disability trust fund reserves will go bankrupt in 2035 has made more Americans nervous, especially those approaching retirement who are worried about the benefits they can expect.
The 2024 Social Security and Medicare Trustees report projects insolvency a year later than last year’s estimate. This somewhat more favorable outlook stems from the strong economy and wage growth, which has increased payroll tax payments that finance the program. For now, low unemployment means more workers are adding to the program, even as a growing number of baby boomers begin to take advantage of its benefits, administrators said.
The potential depletion of the fund does not, however, translate into an empty box. There will still be money to pay benefits at this stage – albeit only 83% of what was promised to current and future beneficiaries. In other words, without a solution, beneficiaries could see a 17% cut in benefits.
“Congress is painting itself into a corner to resolve Social Security’s pending insolvency,” Mary Johnson, a policy analyst for Social Security and Medicare, told Yahoo Finance. “Failure to act on the program in a timely manner would lead to automatic benefit cuts.”
How widely would this cut be felt? The program paid out nearly $1.4 billion in benefits last year to about 67 million Americans. For about half of seniors, Social Security provides at least half of your incomeand for around 1 in 4 elderly people, it represents at least 90% of income.
There are several solutions to correct the deficit, including increasing payroll taxes that fund the program, currently 12.4% split equally between employees and employers. Other proposals include raising the retirement age for younger workers or increasing the upper limit on a person’s income that is subject to Social Security tax. For 2024, the Social Security tax limit is $168,600.
See more information: How to Find Your Social Security COLA Increase in 2024
Social Security beneficiaries could see a 17% cut in benefits in 2035 if no changes are made to the system. (Getty Creative) (Douglas Sacha via Getty Images)
Will Social Security be there for you?
One of people’s biggest fears in retirement is a reduction or elimination of Social Security in the future, according to research from the Transamerica Center for Retirement Studies. Seven in ten people are worried that Social Security won’t be there for them when they’re ready to retire. And nearly 1 in 3 people relies or expects to rely primarily on Social Security.
I spoke with several experts about the advice they are giving their clients about planning for Social Security as part of their retirement income. Here’s what they said:
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1. Assume a reduced benefit
Many planners said they already consider the potential Social Security deficit with their clients.
“I tell clients this is just the latest projection that there will be reductions in current and future benefits for retirees,” said Rob Williams, managing director of financial planning at Carlos Schwab. “The date changes and the amounts change slightly, but the story has not changed – the projections are not that benefits would suddenly cease or that Social Security would disappear.”
Many workers also raised their hands.
“In my conversations with clients, they already assume they won’t receive anything from Social Security,” Alvin Carlos, certified financial planner and financial advisor at District Capital Management in Washington, D.C., said in an interview.
“I try to set their expectations that they will still receive three-quarters of their benefits. But I encourage them to save more in their 401(k), IRA or brokerage accounts. And we recommend that most customers wait until 70 years to start collecting Social Security. It’s basically insurance against living to be 95 or a hundred.”
“My younger clients, probably 50 and under, discuss this in jest, but I actually mean it when we do our planning because I will tell them that I am not planning on taking Social Security,” added Alanna Morey, financial planner certified. with Private Wealth Advisor at Ameriprise Financial in Naples, Florida. “So for clients who are still in the accumulation phase, it’s really about planning to assume this isn’t going to be a big part of your retirement picture. For me, it’s better to do it this way and be overprepared than underprepared.”
See more information: What is the retirement age for Social Security, 401(k) and IRA withdrawals?
One of people’s biggest fears in retirement is the reduction or elimination of Social Security in the future. (Getty Creative) (PeopleImages via Getty Images)
2. Save, invest and don’t claim in advance
To reduce the stress you may have about whether Social Security will be available to you, take control by saving and investing, and start as young as possible, Williams added.
“The responsibility falls on each of us to make a plan, then save and, ideally, invest to build a nest egg. Control what you can control – saving and investing are those things.”
All of the planners I spoke with agreed that fear of losing Social Security can be a motivator for people to file for benefits as soon as they are eligible at age 62.
The problem: Claiming benefits early will drastically reduce your monthly check. It is not advisable.
“With news like Social Security being depleted and the emotions we all face, it’s natural to make a decision emotionally,” Williams said. “There’s a feeling I hear from clients: ‘I want to get the money while I can, before it’s gone’ or ‘I have to because they’re really going to screw it up.’”
The best way, he tells clients, is to think about the long term. “Stop, pause, step back for a moment, absorb those emotions, and then come up with a more reasonable plan that isn’t driven by emotions,” he said.
He suggests people aim for full retirement age. It’s 67 if you were born in 1960 or later. If you could wait until you were 70, great. “It takes discipline, but the longer you wait, the higher your benefit payments will be for the rest of your life,” he said.
Not everyone has the option of delaying Social Security. For example, workers in highly physical jobs may not be able to delay retirement and benefits due to physical issues, so they turn to Social Security as soon as possible. (Dan Dunkley via Getty Images)
3. Delay Social Security – only if you can
Waiting until age 70 is great advice for Americans who are in good health and have other sources of income.
But some people may not have a choice out of necessity.
This week, I received an email from a reader who clarified this point for me. He had read my column about how most Americans expect to retire from full-time work at age 62 and why I thought it was a bad idea.
He wrote: “Many of us don’t want to retire early, but we have no choice. My story is typical of those who work in retail or other highly physical jobs, as we can no longer do the work we are doing due to physical decline. So we take our Social Security as soon as we can. And many, again, like me, would like to return to work, but are told that we are not qualified for anything except the jobs we just left and that we are too old to start positions in non-physical job types. ”
He encouraged me to “take into consideration the number of people who cannot afford to work in an office their entire lives and have no choice but to retire early.”
He is right.
Congress has less than a decade to fix the shortcomings facing millions of Americans like this man. Let’s hope they finally take it seriously.
Kerry Hannon is a senior columnist at Yahoo Finance. She is a career and retirement strategist and author of 14 books, including “In control over 50: how to succeed in the new world of work” and “Never too old to get rich.” Follow her on X @kerryhannon.
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