Dealing with the Uncertainty of Social Security

More likely than not, the baby boomer generation is contemplating whether or not social security will even exist by the time they reach retirement and begin withdrawing funds from their accounts.  Their concern is definitely warranted.  Not only baby boomers should be concerned, but everyone should consider the role that social security has the potential to play in his or her retirement portfolio.

Follow the Money

Let’s consider why future of social security is unclear.  In contrast to your contributions made into a 401(k) plan or IRA, payroll taxes which are withheld from your paycheck for social security do not go directly into an account assigned to you personally.

Instead, social security funds are allocated to pay for the retirement benefits awaiting today’s retirees. Benefits will be distributed partially by payroll taxes on the next generation of workers whose benefits will then be distributed partially by the following generation, and so on.

This method has the potential to work well, however, is dependent on enough individuals paying into the system in comparison to the number of individuals collecting benefits.  In prior years, there were typically ample workers to support each recipient of benefits.

Unfortunately, in recent years that ratio has been quickly decreasing.  More disconcerting, is the fact that there is no recuperation in sight as baby boomers are increasingly reaching retirement age and beginning to collect benefits, while life expectancies are continuing to increase.  Without any action being taken, the current annual surpluses could possibly turn into deficits in this decade or the next, which would place the system in an untenable situation.

Don’t Count on It

Social security probably won’t disappear completely. Legislators would probably implement a mixture of higher payroll taxes and reduced benefits. For example, if legislators raised the “full” retirement age to reflect the longer life expectancies occurring today, this would in turn reduce benefits.  (The current full retirement age begins at age 65 for those born before 1938, 66 for those born from 1943 through 1954, and 67 for anyone born after 1959. For intervening years, the age increases by a number of months.) Another commonly debated possibility is a more fundamental re-envisioning of the program, which could possibly include private investment accounts for younger workers.


No matter what the case is though, your retirement plan shouldn’t depend on social security, but it should factor in your projected benefits. If your expected retirement date is sooner than later, it’s safe to say you’ll be able to count on social security being there for you in its existing form. However, if you’re relatively young, it may be more logical and more likely the possibility that the program could experience significant changes before you reach retirement age.

Find Your Comfort Level

No matter how distant or near your retirement is, you should start considering how large of a factor social security will play in your retirement strategy.  You can then determine the amount of assets you’ll need to accumulate to provide yourself with a comfortable retirement income in combination with the monthly social security stipend.

Another important factor to consider when approaching your retirement strategy is your age.  This is an important factor when taking into account your tax-advantage retirement accounts such as IRAs, 401(k) plans, and brokerage accounts.  Younger investors can usually afford to weigh their investment portfolio in higher-risk assets, such as stocks, as they have a longer time horizon and ability to wait out any possible market downturns.

With that being said, even investors who are approaching retirement should contemplate including some stocks in their portfolio to maintain pace with the rising cost of living over time.  No matter what your age, you’ll benefit from having a diversified investment portfolio.  Based on market fluctuations, assets are expected to move up and down at different times and with a diversified portfolio you have the ability to better protect yourself.  Consult with your financial advisor to help determine the appropriate asset mix that is most suitable for your financial situation.

Don’t Wait

Unfortunately, social security isn’t as secure as most individuals would like it to be.  So make sure to integrate your social security benefits, whatever they may end up being, into your wider retirement-funding strategy.

© 2015


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