It is not uncommon for clients to ask, "why do I need a retirement plan?" Many clients believe that, with social security and a 401K, they have nothing to worry about, when it comes time to retire. The reality is, we all need to take our retirement into our own hands, and not be dependent on government benefits to secure a comfortable retirement for us.
Understanding Social Security benefits
Many people have a concern about the certainty of the Social Security system. Realistically, the prospects of relying on government retirement benefits are not good. This is how the Social Security system works. While you are employed, you make contributions into Social Security in the form of Federal Insurance Contributions Act (FICA) taxes that are typically withheld from a paycheck. Those contributions are used to pay Social Security benefits for other workers when it is their time to retire. Once it is your time to retire, you receive benefits from the system, as well.
Social Security benefits may be uncertain
According to one study, the ratio of covered workers versus beneficiaries under the Social Security program has decreased significantly. Back in 1940, 35.3 million workers paid into the system, but there were only 222,000 beneficiaries. That was a ratio of 159 to 1. However, in 2003, there were 154.3 million workers, and 46.8 million beneficiaries; a ratio of 3.3 to 1.
With more and more people retiring and living longer than before, a greater burden is being placed on the Social Security system. Ultimately, the strain on the system may require our government to reduce social security benefits, or even suspend them completely.
Effects of unforeseen medical expenses
As we age, medical problems typically increase, as do health care expenses. Without sufficient financial support, medical expenses may create a financial burden, too large for you to bear. So, a part of your retirement plan should probably include long-term insurance (LTC), to help finance your health care needs during retirement.
What if I want to retire earlier?
Under Social Security, the earliest you can start collecting retirement benefits is age 62. However, the longer you wait to start collecting social security, the larger your payments will be. In fact, you will not receive your full retirement payout, unless you wait until “full retirement age,” which has been increased to 67 years old, for those born in 1960 or later. For individuals born before 1960, their full retirement age will depend on their birth year.
Social Security benefits may not be sufficient
At one time, the financing of retirement came from employers and government benefits. But now, with the uncertainties of the long-term sustainability of the Social Security program, it has become necessary for individuals to take retirement planning into their own hands. Even if Social Security benefits are available for you, it is questionable whether they will be sufficient for a comfortable retirement. It might be useful to consider the purpose of the Social Security program as a means to provide a minimal standard of living during your retirement. So, without proper retirement planning, your golden years may not be as comfortable as you may have hoped.
If you have questions regarding social security retirement benefits, or any other retirement planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.