Our readers have asked us: “Will Social Security even exist when I’m ready to retire? What should I do to prepare myself?”
First, let’s demystify.
According to the government, Social Security should be intact until the year 2041; after that, benefits will probably be reduced.
The age limits for Social Security are also creeping up year by year. If you’re under the age of 35 (and even if you’re not), chances are that you’ll be retiring after 2041.
So, what does this mean?
1. Social Security Is Icing on the Cake, Not the Cake Itself
It’ll be great to receive social benefits, but don’t plan your finances around the assumption that you’ll get this extra boost. As it is, on average, retirees receive a little more than $1,000 per month from Social Security, which isn’t enough to cover housing, food, healthcare, and other living expenses for most people. In the future, expect to wait even longer and to receive even less money. So, think of these payments as sweet little bonus checks—but don’t depend on them to support you.
2. Be Your Own Social Security
You know that we want you to contribute the full annual limit to your company-matched 401(k)—if you don’t have a 401(k), we want you to max out your individual retirement account (IRA) instead. You can have both a 401(k) and IRA, so we’d really like you to max out both. Here’s why: A few thousand dollars invested at age 25 can turn into hundreds of thousands by retirement. Even without Social Security, maxing out your Roth IRA every year from a young age can leave you enough to retire for a whole 30 years on a respectable income each year.
3. Start a “Standard Of Living Fund”
If you only put the government-dictated amount into your IRA each year ($5,000), you’ll have enough to avoid being in trouble when you hit retirement…but you probably won’t have enough to live the comfortable life you’re used to. So, if you don’t want to drastically reduce your standard of living when you stop working—or if you started saving for retirement after the age of 30—you need to save extra money in what we call a “standard of living fund.” That’s just our snazzy name for extra savings that you keep in an investment portfolio. Don’t withdraw this money until retirement, just as you do for your normal retirement account. (Read this for how to create a portfolio.) Standard of living funds are important because they’re the reason many retirees can afford to travel and enjoy their golden years to the fullest.
4. You CAN Save Enough to Retire Comfortably!
Trust us. Whether you feel like you don’t make tons of money or have started saving later than you should have, all is not lost. If you skipped two movies and invested the ticket money instead ($24 if you live in an expensive city like New York), you could end up with close to $200 by retirement, right there.* Whatever you contribute will make a difference.
5. Make Sure Your Salary Is Keeping Up With Inflation
Earning more will allow you to save more. Make sure that you are asking for a raise every year. On the whole, inflation tends to hover around 3%, meaning that each of your dollars is worth that much less every year. So, if your salary isn’t increasing at all, it’s actually decreasing because you’re losing money to inflation. When you ask for a raise, bring supporting documents to argue why you deserve even more money than the inflation increase. If your job doesn’t provide a 401(k), try asking for a raise to counter the fact that you’re missing out on a company match. If you get that raise, however, don’t spend it on a night out: Use that money to match your own retirement contributions. After you’ve maxed out your IRA, tuck the extra money away in your standard of living fund.
More than anything, remember that you’ll get there with a bit of hard work. As a wise person once said, don’t panic.
*If you contribute this money to a Roth IRA at age 25 and retire at age 65, earning an inflation-adjusted 8% per year.