Social Security celebrates its 90th birthday this year, and the private-sector plans that are indispensable to financing retirement interact in a most complementary way. Here are some insights into why and how.
Tried and True
“One of the great benefits of Social Security is that it is an income stream that continues to pay you for the rest of your life,” remarked Joseph Patrick Roop, the founder of Belmont Capital Advisors.
Phil Battin, President and CEO of Ambassador Wealth Management, struck a similar tone and elaborated, saying, “One benefit to Social Security is the built-in inflation hedge as benefits are linked to CPI and COLA increases are adjusted annually, which helps make Social Security more a core benefit rather than a supplement for those with more modest means.”
“Most 401(k) record-keepers incorporate Social Security benefits into their online planning tools for plan participants,” Battin noted, adding that Social Security “works as a nice baseline to help offset critical needs in retirement and can really help your money last longer.”
…But Not Enough
Battin may consider Social Security a “core benefit,” but at the same time he indicates that Social Security is not a panacea.
“For those who don’t save enough, and that includes a large portion of the working population, Social Security will unfortunately be their core source of income,” he said.
Roop also suggested that simply relying on Social Security to finance one’s retirement may not be sufficient.
“The Social Security Administration has been warning retirees and consumers for years that the trust fund will be exhausted in approximately 2033 to 2035. At that time, there will be a cut in all Social Security benefits by approximately 20% to 25%,” he noted. “With this in mind, when planning for retirement, one should not count on Social Security as your primary earning source.”
‘Critical’ Connection
Battin made it clear that he considers employer-provided retirement plans to be the pre-eminent component of the partnership.
“I consider Social Security a supplement to retirement plans, versus the other way around, especially for those who have taken advantage of the opportunity to save,” he said, adding, “For many people, their 401(k) will be their largest single financial asset, eclipsing home value in many cases.” Employer-provided retirement plans are “critical.”
Should retirees be worried about earning the maximum from Social Security in light of the presence of private-sector retirement plans? Or does that not matter as long as they keep a healthy retirement savings plan?
No — and yes, said Roop. He “would not recommend” that wage earners who are still working and contributing to Social Security and who are close to the benefit base work extra hours or try to increase their income just to maximize the Social Security earnings threshold.
“One needs to remember that Social Security income is based on one’s highest 35 years of pay. Changing one, two, or even three of those 35 years usually has no significant impact.”
But he added that there are circumstances in which some workers may find such an approach useful.
For instance, Roop said, increasing wages may have a positive effect for those “who are earning 1/4 or 1/3 of the benefit base and have consistently earned similar wages.”
Action Steps
Roop argued that workers should take advantage of the information available from the Social Security Administration (SSA).
He suggested going to their website and annually verifying that one’s earnings are being credited to one’s account. He further suggested noting what the SSA says one’s estimated payment will be at full retirement age and using its calculators to estimate future benefits.
Roop suggested the following steps in determining the optimal percentage of employer-based plan savings:
- Find out if your employer offers a matching contribution of any kind.
- Find out if your employer offers a Roth option.
- Determine your budget and how much monthly or annual income you will need in retirement after taxes.
- Seek professional assistance in (1) building a financial plan you can understand and (2) determining exactly how much you need to contribute in order to maintain a lifestyle to which one has become accustomed to or wants to have.