Solvency of Social Security
We think part of the reason it could be helpful to have other sources of retirement income besides Social Security is due to questions about the future solvency of the program. The size of the baby boomer generation, which now ranges in age from 58 to 76, means that Social Security may not be sustainable in its current form.
The 2022 Social Security Trustees report states that retirees will start receiving a reduced benefit in 2034, unless legislative changes are made to either bring additional money into the program or decrease the number of people drawing from it. To that end, we believe the ages at which Americans can access benefits could continue to be pushed back in the future, particularly if longevity keeps increasing. Currently, a person can begin receiving partial Social Security benefits at age 62, with full eligibility at age 67.
To illustrate how times have changed, life expectancy at birth in 1930 (five years before Social Security launched) was only 58 for men and 62 for women. As of 2021, those figures had reached 73.2 for men and 79.1 for women. Thus, people are now more likely to live for decades after retiring, and their income will need to last throughout that time.
There are also tax considerations when approaching and entering retirement. For example, up to 85% of your Social Security benefit can be taxed if you exceed the IRS income limits. Additionally, the IRS states that when holders of traditional IRAs or employer-sponsored retirement accounts reach a certain age, they must take a required minimum distribution each year. The current age to start taking RMDs is 72, and those who fail to comply could be subject to significant penalties.
Since taxes could take a big bite out of retirement savings, we believe it’s important to protect your lifestyle by creating a plan that proactively manages your income and income tax. We think this is another reason you should consider working with a financial professional, who can help estimate how much income you’ll need in retirement and advise you on how to structure your income sources. We believe key considerations include the amount of income that will be taxable, and how to allocate pre- and post-tax dollars.
We recommend implementing a structure and strategy for each year of retirement. Having multiple buckets of money could help make your life easier because of the flexibility they may be able to provide. We think it’s sensible to minimize overall tax liability when making retirement withdrawals, and one possible avenue is qualified charitable distributions. For instance, if you have an RMD of $100,000 and would like to donate $20,000 of it to charity, that donation amount could be made tax-free if it is given to any 501(c)(3)-registered company through utilizing its employer identification number.
When it comes to retirement planning, we don’t think you should just wing it. Regardless of your risk tolerance, we believe you need to have a game plan and a portfolio that matches it. We also think you need to understand your cost of living and keep your outflows buttoned up. Due to the possible impact of longevity, we also recommend delaying Social Security benefits as long as reasonably possible. While it’s true that any of us could die tomorrow, unless you have health or generic risk factors, we believe you should base your financial plan on living at least into your 80s and potentially even 90s. We think you should start planning now, if you haven’t already, and build that plan to help weather the phases of market cycles. Want help getting a retirement plan together that works for you and your needs, please reach out to talk with one of our retirement planners to learn more.