How Social Security Fits into Your Retirement Plan
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How Social Security Fits into Your Retirement Plan
Start now (no matter what your age) to help fill the gap between what you'll receive from Social Security and what you'll need for the retirement you want.
From the Merrill Edge Minute e-newsletter.
Key Points:
  • Social Security will likely remain a significant source of retirement income for most Americans.
  • Beginning in your 20s, consider our savings and investing suggestions below to supplement what Social Security won't cover.
  • Waiting to claim your benefits may help you maximize their value.
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Will Social Security survive?

Many people are wary about the future solvency of Social Security, and they are uncertain about what role it can play in their retirement planning.

Social Security was created in 1935, and since then, medical advances and healthier lifestyles have dramatically increased life expectancy. Longer lives translate into more money being paid out because Social Security benefits continue for as long as you live.

The number of Social Security beneficiaries is growing far more rapidly than the workforce, whose contributions fund the Social Security system. This may lead to funding shortfalls starting in 2034. The chart below illustrates the projected declining ratio of contributing workers to Social Security beneficiaries.

The Not So Good News: Social Security is Threatened by an Aging Population

Even though Social Security's funding ability is being stressed, experts say reports of the program's demise are greatly exaggerated. Unless there's a total collapse of the U.S. economy, there will always be employee contributions flowing into the Social Security system, according to Kurt Czarnowski of Czarnowski Consulting, who served as a regional communications director for the Social Security Administration for nearly 20 years.

Despite the projected deficits, the program is expected to pay 100% of promised benefits through 2033. In 2034, Social Security would still cover 75% of its commitments, and Congress is expected to make changes before then to help the system remain solvent, Czarnowski says.

A solid bedrock of your retirement plan

The strong likelihood that Social Security will continue to provide promised benefits long into the future means that you should be able to look to it as one part of your retirement paycheck. Social Security was never intended to be the sole source of retirement income, however, and today's Social Security benefit accounts for about a third of retirement income for all retirees age 65 or older.(1) That's enough to make it an important source of retirement income for most people, as the chart below shows. And, over time, your monthly Social Security payments can make a significant contribution to your retirement income — approximately $250,000 for a typical individual and $500,000 for a typical couple.

Retirement Income Sources: All Retirees, Ages 65+

The Social Security Administration's Retirement Estimator lets you estimate the benefits you'll receive in retirement. While those benefits won't likely be your only source of retirement income, they are guaranteed for life and adjusted for inflation. That gives you a solid bedrock to build on.

Key financial steps throughout your life

Once you have an estimate of what to expect from Social Security, you can look at your other retirement saving strategies to help you better determine if you'll have enough to fund the retirement you hope to enjoy.

As you think about retirement saving, here are some steps to consider throughout your life.

In your 20s

In your 30s

  • Establish what you want your retirement to look like and build toward that goal.
  • Aim to begin contributing at least 10% of your annual income to your retirement accounts — a target that applies to all age groups.
  • Make sure that you have an adequate emergency fund set aside so you won't have to put a big dent in your retirement savings if you lose your job or have to cover a significant unplanned expense.

In your 40s

  • You're probably earning more during these years, so try to increase your contributions to either your
    401(k) or other retirement account.
  • Revisit your emergency savings to make sure they're adequate for your current expenses (at least six months' worth).
  • If you have 401(k)s with former employers or retirement accounts at multiple institutions, consider consolidating them to simplify.

In your 50s and beyond

  • If you haven't been able to save as much as you'll need or want, you can now contribute more through increased IRS limits called "catch-up contributions" to your IRA and 401(k).
  • Continue to maintain your emergency fund.
  • Work toward paying off or paying down your mortgage before retiring, if possible.
  • Revisit your emergency savings to make sure they're adequate for your current expenses (at least six months' worth).
  • Consider purchasing long-term care insurance.
Enhancing your Social Security benefits

When you do near the age at which you plan to retire, Social Security is likely to become part of your income plan. But you have a choice about when to begin receiving benefits, and delaying the start can help you maximize its value. Postponing benefits means you could receive more throughout your lifetime.

Age 62 is the earliest you can begin receiving Social Security benefits, but for each year you wait (until age 70), your monthly benefit will increase, and the additional income adds up quickly, as the chart below shows.

Annual Social Security Benefit Increases

If you postpone taking benefits until age 70 instead of collecting at 62, your monthly payment amounts will be 76% higher, according to Bill Hunter, director, IRA Product Management, Merrill Lynch.

But health problems or a job loss can alter the best of plans, leading you to opt for earlier benefits.

"The message here is just to concentrate on what you can control," Hunter says. "Life is dynamic, and your retirement plan should be too. It's not a case of 'set it and forget it.'"

Whatever you decide, the good news is that Social Security is likely to remain a part of the retirement income picture for some time. As you consider your retirement saving strategy, think of Social Security as a foundation — one to build on that can help you work toward having enough money to fund your retirement years.


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(1) According to the Social Security Administration's Income of the Aged Chartbook, 2010 (released March 2012).

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