Don't rely solely on
Social Security for your retirement needs. It is an iffy
proposition since the percentage of people 65 and older is
increasing rapidly.
The Big Social Security Myth: It
ensures that we’re financially “secure” in our later years.
Fact: Its own financial future is
in peril. In other words, don’t count on Social Security offering
the same financial security in 20 or 30 years as it does for
today's retirees.
It’s hard to imagine surviving retirement
without the comfort of monthly Social Security checks arriving in
the mail. Before 1935, Americans did exactly that, however. It
took the abject poverty of the elderly during the Great Depression
to convince Congress to approve President Roosevelt's plan for
basic subsistence payments to senior citizens.
The Salad Days Are Over
The program’s salad days started in 1972, when benefits were
linked to the nation’s inflation rate, guaranteeing recipients
that their monthly payments would rise with each year’s cost of
living. The party’s over. The burden on working Americans grows
each year. Payroll taxes siphon 6.2% of the first $90,000 a person
earns in 2005-- an all-time high.
It Cuts Both Ways
From a financial planning perspective, Social Security is a
double-edged sword. The program has a positive impact because it
provides a basic level of retirement income. The flip side is that
Social Security engenders a false sense of security, lulling many
people into thinking they do not need to work very hard and
sacrifice very much to save for retirement because those
government checks will just keep rolling in.
Times have changed since 1935, and for
the worse. When Social Security was started, 16 workers were
paying into the system for every retiree receiving benefits. Now,
only three workers contribute per retiree and by the year 2020 the
ratio will be two to one -- two workers paying in for every
retiree taking out. Even with several changes enacted in recent
years to address the shortfall, Social Security still can't
provide the same level of benefits 20 years from now that it does
today.
Charting Your Own ‘Survival’ Route
What does this mean for your retirement planning? You should count
on getting something, but "something" is not going to increase
with inflation. Your retirement benefits depend on the number of
fiscal quarters (or three-month increments) you have worked, the
amount of your annual income in each of the last 35 years of your
working life, and your age at retirement.
The higher your earned income, the more
your monthly benefits will be, although these increases are not
proportional. For example, let’s assume that you are single and
your lifetime income inched upward from year to year. If you
received $30,000 during your last year of work, your monthly
benefits would start at somewhere around $1,100. But if you double
your income to $60,000, the benefits only increase about 15% to
$1,250.
Benefits provide a minimum level of
coverage, but don't expect to live on Social Security alone. The
average monthly payment in 2004 was $1,050. Women are particularly
vulnerable to lower benefits -- they often leave the work force
for periods of time to raise children, and they generally received
lower pay than men throughout their working lives.
Get A Social Security Statement
Regardless of your exact future benefits, Social Security is still
an important part of your retirement planning. The best way to
start is by finding out your estimated benefits through the Social
Security’s Internet request for a statement on its
website.
The Social Security Administration also is now sending out annual
updates of the statement, sent shortly after your birthday.
The report shows your estimated annual
benefits at age 62, at your "normal" retirement age (65 to 67,
depending on your year of birth), and at age 70. These are
estimates of future benefits, with an actual dollar amount at that
time. If a projected benefit is $1,500 a month at age 65, that may
sound terrific to you now because you’re thinking of what $1,500
buys today.
Taking Steps To Protect Yourself
There are some important steps to take when you get your report.
First, check your reported earnings for each year you worked. Just
like any other bureaucracy, mistakes are made.
Second, take a good look at how your
benefit varies according to your retirement age. If you retire at
62, generally you will only get 80% of your benefits at normal
retirement age. Conversely, you will get an extra 8% for each year
you work past your normal retirement age. If you’re married, your
non-working spouse will get 37.5% of your benefits if you retire
early and 50% at your normal retirement age.
Remember that the normal retirement age
is no longer necessarily 65; as of the year 2000, it's begun to
rise. Looking at your various retirement benefits, you can figure
out the best time for you to start taking Social Security.
Third, decide how much you want to rely
on Social Security. The younger you are, the more likely it is
that your benefits will be less than projected. As a safety
measure, you might assume your actual annual benefit would be 75%
of current estimates. Whatever your method, plug that Social
Security number into your retirement needs analysis to see how
much you will have to save on your own to provide the income you
want. Then make a plan to save even more than that, if you can.
Don’t Pick Up That Phone
One final tip: When you deal with the Social Security
Administration, do it in writing. If doing so is impossible, go to
a Social Security office. Use the telephone as a last resort.
Whether in person or by phone, take copious notes, and get the
employee’s name and ID number with whom you are dealing.
You won’t be penalized if you receive
incorrect information from the employee and you have proof. If you
are not happy with the Social Security Administration's decision
about your situation, you can file a “reconsideration.” You can
also ask to have any deadlines waived until your problems are
resolved.
It’s Your Money
Social Security was never designed to pay for a life of luxury,
but even with its current fiscal woes, you can probably count on
something when you retire.
There are several "rescue" plans on the
table now, allowing workers to invest some of their Social
Security contributions themselves, allowing the federal government
to invest some of the programs' billions in the stock market, and
making other massive changes to the system. Whatever the outcome,
it’s clear that the days of guaranteed, steadily increasing
benefits are over.
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