To plan, or not to plan, for Social Security?

Retirement planning is important for everyone who wishes to stop working at some point in their life, but especially for anyone born in 1968 or later. That’s because the Social Security Administration reports it will no longer be able to fully fund Social Security payments starting in 2035, assuming Congress doesn’t make changes before then. If your children were born after 1968, they will reach full retirement age after the anticipated fund depletion date.

For young adults in their 20s and 30s, Social Security may only be a notion they assume will be there in the future. The good news is, young adults have time to plan for the possibility that Social Security may or may not be available, or be paid in full when they qualify for it.

Flexibility is key

It’s important for young adults to start wealth planning early. Regardless of one’s point of view on the future viability of Social Security, it is important that young professionals start saving—period.

Time is the biggest factor with the benefit of compounding money. The sooner a young adult can focus on saving a portion of his or her income, the more likely they are going to stay within their means for the rest of their lives.

As part of retirement planning, consider approaching Social Security benefits cautiously, mostly because the monthly payments aren’t huge. Young professionals may want to focus early financial planning efforts on building emergency funds,

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purchasing life insurance and preparing for how they may need to help care for older parents. These are all potentially expensive items that Social Security payments won’t cover. Plus, factors like student loans and spending interests tend to get in the way of thinking about saving for retirement. For these reasons, young adults and financial professionals may want to discuss when to shift focus to retirement savings and how to adjust spending habits when the time comes so that sufficient savings can be accumulated to help fund retirement goals.

Of further concern and interest to young adults today is the fact that 2035 is another projected time when Social Security payments may come under threat. Studies conducted in 1981 determined the funds would have to be reduced in 1983 if changes weren’t made. In 1983, Congress approved legislation changing benefits affecting people who are now in their 60s by changing the minimum retirement age when you can collect full Social Security benefits (age 67 or anyone born in 1960 or later) and also taxing benefits.

If legislative changes don’t happen, the Social Security Administration reports benefits would be cut to 80%, starting in 2035. While time remains for Congress to make new changes prior to that, it may be practical for younger adults to plan around the possibility of benefits changing.

That’s not to say younger people should not include Social Security when planning. As long as you review your plan year-over-year, you may have time to make changes.

Another strategy that may help younger people feel more confident about retirement planning is to apply different scenarios for Social Security, including adjusting for anticipated cost-of-living increases. Projecting spending needs based on various anticipated inflation increases can help clients and financial professionals determine what they may need to prepare for when it’s time for investments to help produce income during retirement.

To plan, or not to plan, for Social Security?

No crystal ball

During his presidential campaign, President Joe Biden proposed increasing the payroll tax for Social Security. As of January 1, 2021, workers were taxed on up to $142,000 of their income. Biden’s campaign discussed taking that amount down to $137,000 (with inflation adjustments also included). The campaign also proposed taxing people who earned more than $400,000, in effect providing a tax break for earned incomes between $137,000 and $400,000.

There’s a long road ahead to see if those proposals make it into legislation, but should future changes be forthcoming, many experts believe that Social Security will be restructured in a way that does not affect benefits for Americans who are close to reaching full retirement age while allowing time for younger generations to plan around the changes.

Although it’s impossible to predict what future administrations and Congress will do to potentially change Social Security, young adults may have 30 to 40 years to prepare financially for a happy and comfortable retirement. Yet this clear advantage also presents a challenge, from the simple fact that it may be difficult for young people to think that far ahead. After all, the distance between “now” and retirement seems to be so vast when you are in your 20s and 30s. It feels like a lifetime away.

But many people who are retired or are nearing retirement say they wish they had started saving earlier. So use the time you have to your advantage. Contact your financial professional and get started today.

NMG Capital Group helps high net worth individuals, families, and small to mid-size institutions grow and sustain their wealth through innovative and scientific investment practices. We offer a wide array of services to businesses from retirement planning and risk management to strategic and corporate finance advisory services.

The articles and opinions expressed in this advertisement, prepared by Newkirk Products, Inc., are those of the author and are not necessarily the same as those of Clearing & Custody. Clearing & Custody did not assist in the preparation of the material and makes no guarantee as to its accuracy or reliability or the sources used in its preparation. Please note that Clearing & Custody does not act as administrator or record keeper for 401(k) plans or any other defined contribution plan. The material contained herein is for informational purposes only and does not constitute tax or legal advice. Plan sponsors and investors should consult with their own tax advisors or attorneys with regard to their personal tax and legal situations. All information as of 03/21/2021.

RBC Clearing & Custody, a division of RBC Capital Markets, LLC, Member NYSE/FINRA/SIPC, provides clearing and execution services and/or custody services for accounts managed by your financial professional. The referenced product or service is available through that relationship.