Thought Leader Series: Retiring on Only Social Security: Great or Terrible Idea?

Social Security benefits

Rebecca Wiggins is the Executive Director of AFCPE and holds a Masters of Family Financial Planning from Kansas State University. Search for an AFCPE Certified Professional in your area by using the association’s search tool.

Now in its 80th year, Social Security is still the cornerstone of the American retirement plan. Following the Great Depression, Social Security is an important form of social insurance established to ensure that Americans, especially those from lower-income families, do not have to retire in poverty. And while social security continues to offer a source of security for many hard-working Americans, there are substantial risks of relying on Social Security as a sole source of income in your golden years.

Social security benefits

Here’s why:

The retirement landscape is changing.

According to NASI, when social security was implemented in 1935, an American who retired at 65 had a life expectancy of 12.5 years. Today, that same American is expected to live nearly 20 years past retirement.

Another impending change is the retirement of an enormous Baby Boomer population. In 2031, when the youngest of the Boomer generation reaches age 65, the number of Americans 65 and older is expected to double. Policy changes are needed to maintain Social Security as it stands today.

Even the most frugal spenders find living solely on Social Security challenging.

In February 2015, the average retiree received $1,331 per month from Social Security. This income alone is not enough to keep them above the federal poverty line. For this reason, many Americans continue to work well past retirement age.

American healthcare costs are going up.

According to a recent Fidelity study, healthcare costs among retirees can reach up to $220,000 per couple, and more than 70% of retirees will need long-term care that won’t be covered by Medicare. Being prepared for emergency expenses is an important aspect of any long-term retirement plan.

Knowing the facts, it’s no surprise that saving for retirement is the number one financial worry for 60% of Americans. But all too often, this worry stems from a lack of education and preparation. There are plenty of resources available to help people prepare for a happy retirement:

Open a my Social Security account. It’s a free, secure, online account that gives you immediate access to your personal Social Security information. Even before retirement, you can view your Social Security statement to check your earnings record and see estimates of the future retirement, disability and survivor benefits that you and your family may receive based on your earnings.

Contribute to your employer’s 401(k) plan. The Employee Benefit Research Institute (EBRI) found that an estimated 67% of retirees could generate 60% of their pre-retirement pay off their 401(k) and Social Security benefits.

The Social Security Administration estimates that a typical retiree receives approximately 40% of their pre-retirement income from Social Security – a 401(k) can go a long way to filling the retirement gap. Benefits of a 401(k) include automatic payroll deductions, making savings easier; all deductions are made pre-tax, and many employers will match a percentage of an employee’s contributions.

Open a Roth IRA. One of the best long-term investment vehicles is the Roth IRA. It offers younger investors a vehicle to build retirement savings with tax-free withdrawals after age 59.5. This is different from a traditional IRA, where taxes are deferred on the savings until the money is withdrawn. Because of compounding interest, this approach is a long-term growth opportunity. Additionally, tax-free withdrawals are allowed from a Roth IRA for education and other large purchases such as medical expenses or a down payment for a home.

Don’t have a 401(k)? Consider a MyRA. The United States Department of the Treasury created MyRA for the millions of Americans who either do not have access to an employee-sponsored retirement plan or lack options to save for retirement. Similar to a Roth IRA, MyRA contributions are made after tax. However, contributions can be deducted directly from your paycheck, they grow tax-free, and distributions are not taxable.

If you have other questions, contact a trusted financial professional who can offer unbiased financial advice or guide you to the right resources to make sure you are financially set for your retirement.

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