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Kylie Jones, 24, of Evanston, is concerned about Social Security benefits.
“Given the state of Social Security, that may not be a possibility for me in the future. Are there any extra steps that I should be taking to prepare for retirement?”
Congress likely to maintain Social Security program
Christine Benz, director of personal finance and retirement planning at Morningstar, a global investment management and research firm, said concerns about the reliability of Social Security benefits is a common one.
The Social Security trust funds, accounts that pay out benefits and administrative costs, is expected to be depleted in 2033. Benz said that’s the year when it would be able to pay about 75% of its promised expenses.
“That’s a meaningful cutback, but that doesn’t mean that benefits will go to zero,” she said. “It’s also worth noting that Congress can, and likely will, take steps to shore up Social Security. Because one thing we know is that older adults are reliant on Social Security, in many cases, and they also vote. And so Congress knows that they vote.”
But there are a few things Congress could do with the program that would affect younger people, or high-earners who are receiving Social Security.
One would be lifting the age at which a person could claim benefits. Full retirement age was 65 until Congress in 1983 started gradually increasing it to 67, where it is now.
You can currently receive Social Security benefits between age 62 and 70. You’re entitled to full benefits when you reach your full retirement age, and the longer you wait to apply, the higher the benefit, according to the Social Security Administration.
Benz said the Social Security tax cap could also be raised even more. The cap is the maximum amount of annual income that’s subject to a Social Security tax, with the remaining earnings not taxed. It changes each year, and the cap for 2025 is $176,100.
“If Congress lifted that cap, it would help address the [funding] problem,” she said.
Benz also said Congress could implement a type of “needs test,” which could curtail benefits for wealthy older adults.
Save more, invest more
Younger adults should prepare for the possibility of fewer benefits by saving more and investing into retirement accounts such as a Roth IRA, according to Benz.
“Most people do not have pensions any longer. So most of us will be coming into retirement with Social Security and whatever our retirement savings are,” she said. “I always say 10% is a good starting target for people who are just getting their savings plans off the ground. But for higher income workers, or people who have the wherewithal to save more — 15%, or even 20%, is a good target.”
Also, take advantage of company retirement accounts like a 401(k). Benz says for younger adults like Kylie, a Roth IRA can be a nice option because the taxes are paid up front so when it’s time to retire the funds can be withdrawn tax free.
“Roth IRA also gives you a lot of flexibility if you’re just getting your plan off the ground because you can withdraw your contributions at any time and for any reason without any taxes or penalties. So that’s kind of a nice escape hatch if you realize you can’t leave the money … there until retirement,” she said.
It’s also important to think about what you’re investing in. Benz said she likes broad market index funds or exchange traded funds. A nice “one and done” investment is a global version of a total stock market index, which will “give you little bits of exposure to all the companies throughout the world,” she said.
A target-date fund is another investment to consider.
“That is an investment that is going to kind of manage itself until you get to retirement,” Benz said. “It starts off very aggressive for young people, with mainly stocks in the portfolio, and then very gradually takes risk out of the equation. So by the time you hit retirement, it might be 60% stocks and the rest has gone into safer assets like bonds. For people who just want a single investment for life, that’s a really good way to go.”
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