If you’re getting closer to retirement, you might be thinking more about Social Security. Specifically, can you count on it to contribute part of the income you’ll need as a retiree?
There’s been an increase in alarming language surrounding the solvency of Social Security, but in reality, its prospects are not nearly as gloomy as you might have heard.
Here’s the story: Under current law, Social Security is estimated to exhaust its trust funds by 2035, after which benefits could be cut by 20%, according to the 2022 Social Security Trustees report. However, the large cost of living adjustment (COLA) (8.7%) for 2023 could cause the trust funds to use up their resources sooner.
But this outlook may represent a worst-case scenario. For one thing, the cost of the 2023 COLA will be somewhat offset by higher taxes on workers contributing to Social Security. The maximum amount of earnings subject to the 6.2% Social Security tax jumped from $147,000 in 2022 to $160,200 in 2023. And in looking down the road, further increases in this earnings cap may also help reduce the gap in the trust funds. Increasing the payroll tax is another possibility for boosting funding to Social Security.
And here’s a political reality: Social Security is a popular program and it’s unlikely that any future Congress wants to be blamed for reducing benefits. Of course, there are no guarantees, but it seems fair to say that you can reasonably expect some benefits from Social Security when you retire.
But perhaps the bigger issue is just how much you should depend on Social Security for your retirement income. On average, Social Security benefits will provide about 30% of a beneficiary’s preretirement earnings, according to the Social Security Administration. But the higher your earnings before you retire, the lower the percentage that will be replaced by Social Security.
Still, you’ll want to maximize the benefits that are available to you — and that means deciding when to start taking Social Security. You can begin as early as 62, but your monthly payments could be as much as 30% lower than your normal (or “full”) retirement age, which will likely be between 66 and 67.
Even if you were to wait until your full retirement age before collecting Social Security, you’ll also need to draw on other sources of funding. So, while you are still working, it’s a good idea to keep contributing to your IRA and 401(k) or other employer-sponsored retirement plan.
The amount you contribute should depend on your overall financial strategy and your financial needs, so, for example, you probably shouldn’t put in so much into your retirement accounts that you feel significant stress in your monthly cash flow. But when you do get a chance to invest more in these accounts, such as when your salary goes up, you may want to take advantage of the opportunity.
Ultimately, you should be able to count on Social Security as part of your retirement income. You may want to consult with a financial professional to determine when taking Social Security makes the most sense for you and how you can also get the most from your other retirement accounts. You’ll want a retirement income strategy that’s built for the long run.
Sean Payne, CFP® can be reached at (562) 596-3722.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.
Edward Jones, Member SIPC