Should You Count on Social Security as Part of Your Retirement Plan?

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It’s pretty common for new clients to tell me that they’re not counting on Social Security as part of their retirement plan. And it’s easy to understand why.

For years now we’ve been told that Social Security is unsustainable. There were even recent headlines in major publications warning people that Social Security was running out of money and that it was headed toward insolvency.

But the situation isn’t nearly as grim as most people think.

The truth is that Social Security is still on track to pay out most of its estimated benefits through the end of this century, even if nothing is done to strengthen the system. And ignoring it just makes retirement planning harder than it needs to be.

Here’s the real story on the state of Social Security, and how you can include it in your plans.

The Real Story on Social Security

The Social Security and Medicare Boards of Trustees recently released its 2018 Annual Report detailing the current and future state of Social Security. You can click here to read it.

There’s a lot of information in that report, but there are a few big takeaways that are important to understand.

First, the bad news. Social Security has a $2.9 trillion reserve fund that is projected to run out in 2034. That’s because 2018 is projected to be the first year since 1982 that the Social Security program pays out more than it takes in, and without any changes that trend is expected to continue until the reserve fund is gone.

That’s the part that leads to all the doom and gloom, and on the surface it does appear to be bad. But there’s more to the story.

The part that’s often left out when this topic comes up is the fact that the reserve fund is only one of the sources from which Social Security benefits are paid. The program also earns income in the form of payroll taxes and by taxing benefits, and that will continue even after the reserve fund is depleted.

According to the 2018 report, even if no changes are made to the program, and even if full benefits are paid until the reserve fund runs out in 2034, that income alone should be enough to pay 77% of projected benefits all the way until 2092. And it’s not that benefits will stop in 2092. It’s just that the report is a 75-year projection, so 2092 is the last year they looked at.

On top of that, there are some simple changes that could be made to increase that income and continue paying full estimated benefits. Payroll taxes could immediately be increased by 2.78%, or if we wait until 2034 they could be increased by 3.87%. Either one of those changes should be enough to prevent any reduction in benefits.

The moral of the story is that while the Social Security program is not completely fine, it’s also not completely bankrupt. Even if nothing is done to strengthen the program, the Board of Trustees expects that it will have enough money to pay out at least 77% of currently projected benefits.

How Much Should You Count on Social Security?

While it’s impossible to predict the future, my job as a financial planner is to use the best information we have available today to make reasonable guesses as to how things will play out, and to use those guesses to create a practical financial plan.

Given the information provided by the Social Security and Medicare Boards of Trustees, we can say two things with a high degree of confidence.

First, it is not reasonable for most people to expect to receive their full estimated Social Security benefit for the entire duration of retirement. It is certainly possible that Congress will increase taxes, or maybe even push back the age at which you can start collecting benefits, in order to support the payment of full benefits. But as things stand right now, that is not a solid foundation upon which to make plans.

Second, it is also not reasonable to completely ignore Social Security as part of your retirement plan. Given that the income alone should be enough to pay out 77% of estimated benefits, you should feel confident including some benefit as part of your plan.

So, how much of your benefit should you count on? To be honest, there’s no definite answer here and to some extent it depends on personal circumstances. But here are a few things to keep in mind:

  • You can click here to log into your Social Security account and see your current estimated benefit.
  • You can click here to get a quick estimate without logging in or you can click here for a more detailed estimate.
  • Your estimated benefit can change based on your future earnings. Earning more or less in the future can increase or decrease your expected benefit, while retiring early could decrease you benefit as well.
  • The further you are from retirement age, the less likely you are to receive your full benefit.
  • No matter what age you are now, expecting 77% of your estimated benefit is a reasonable place to start. You could consider adjusting that up if you’re close to retirement age, and you consider adjusting it down if you’re far from retirement age and want to be conservative.

Ignore the Doom and Gloom

Social Security isn’t in anywhere near in as much peril as many would have you believe. Even people who are just entering the workforce can likely expect to receive a sizable benefit to supplement their own savings.

None of which is to say that you shouldn’t also save on your own. Your savings rate is still the most important part of you investment plan.

But factoring in Social Security does reduce the burden and can make a reasonable retirement feel a little more realistic. So don’t ignore it. Plan to receive a realistic percentage of your current estimated benefit and you should be fine.

Matt Becker, CFP® is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families.

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