Social Security and the Millennial Generation
At Scarborough Capital Management, we work with clients in all phases in life. And yes, that includes Millennials. It’s always refreshing to see young people saving for their futures and already thinking about their retirement.
Like many of our older clients, some of these Millennial clients are also worried about Social Security. Here are 2 of the most common questions we hear from our younger clients – as well as the answers:
Question 1: Will There be Enough for Retirement?
According to a report by the Social Security Administration (SSA), the Social Security fund is shrinking, and by 2034, it will no longer have enough to pay out current benefit levels. But does that mean that Social Security is going away? No.
This report doesn’t mean that Social Security is going to be bankrupt in less than two decades. What it means is that if these estimates are correct, those drawing from the nation’s social insurance program will be getting anywhere from 75 to 80 percent of what’s currently being paid.
Up until 2010, Social Security was actually taking in more money than it was paying out. This created a surplus, and these funds were put in a “trust” where they were invested. But since then, the SSA has been taking in less in taxes than it’s paying out, according to the Wall St. Journal. This is leading to a point where the SSA is soon going to run out of what’s in the trust, and, if the projections are true, come 2034, those trusts will be depleted.
Question 2: What Happens to Social Security at That Point?
If nothing is done, benefits will only be paid out according to what the SSA can take in, and these figures would be based on Social Security tax levels at that time. To give a more real-world example, let’s look at the current Social Security income of your average retired couple, and how it could change after 2034.
Right now, if both are drawing Social Security, they receive about $2,200 per month combined, which yields about $26,400 per year. With a reduction of anywhere from 20 to 25 percent in benefits though, this future retired couple could see their payments as low as about $20,000 annually.
A decrease of a little more than $500 per month may not seem like a lot to some couples, but according to the SSA, “among elderly Social Security beneficiaries, 48 percent of married couples and 71 percent of unmarried persons receive 50 percent or more of their income from Social Security.”
A decrease of this level would be as if you suddenly took a pay cut of 10 to 15 percent, or more. And individuals in these situations may not have many other options in terms of generating alternative income streams.
But there is a way out. If Congress acts, they could set up a way to reroute some tax revenue or overhaul the system to make sure that full benefits are paid out. While this may be mathematically easy, the politics of it could prove to be more challenging.
What To Do
The best thing for Millennials to do is understand that you will have to take more responsibility for your retirement. As we’ve seen pensions decline over the years, Social Security benefits could do the same. Taking responsibility and understanding that you’ll need to save more during your working years can give you the upper hand in your later years.
Next, try to gauge what life is going to cost you in retirement. If you haven’t created a budget for yourself yet, do it now. You’ll have a better handle on what to cut and what to add in later years. A financial advisor can help you with this, putting together a financial plan that works for your specific situation.
Once you have a total, calculate how much you’ve paid in. Remember to estimate conservatively, but rationally.
All the doom and gloom aside, Social Security will still be there in 50 years for those who are just entering the workforce. It just may not be as helpful of a revenue source as it is now for current retirees.
Income Stream Allocation
Another common question we get from Millennials is, “How do you invest? It’s important to diversify your income streams by investing early and eliminating unnecessary debt and interest now. In terms of what percentage of your retirement income Social Security should play, lower is better (ideally, it’s 30 percent or less). A lower percentage means you saved more on your own and thus have a higher total retirement income.
Here’s a breakdown of how your income stream allocation could look:
- Social Security 30%
- 401(k)/IRA 60%
- Cash/cash equivalents 10%
- Part-time work could also play a role
Savings plans such as 401(k)s and IRAs can play a vital role, but you shouldn’t stop there.
Make sure you have enough cash on hand in a liquid account for an emergency, typically about three to six months of expenses. Long-term care insurance can also be a good way to protect yourself from higher expenses in your later years by establishing policies that provide income in the event you become ill.
As this topic gains more media attention, some people will undoubtedly start sounding the alarms of the end of Social Security. Don’t pay too much attention to them. If you control what you can and save responsibly, you’ll be in a position to have a great retirement, without too much worry about Social Security.
Talking with a financial advisor can also help lessen the worry. Schedule a complimentary, no-strings-attached conversation with the financial advisors at Scarborough Capital Management today, and get the conversation started.