Women's Money Wisdom

Episode 220: Should You Count On Social Security In Retirement?

• Melissa Joy, CFP® • Season 4 • Episode 220

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Social Security has been a staple of retirement planning for past generations. But will it be there for you when you decide to stop working? The cost of a comfortable retirement is rising so understanding how Social Security works is more important now than ever. Join Melissa Joy, CFP®, to learn how Social Security works and how it could impact your retirement.

Listen and Learn:

  • How Social Security works & how it supports retirement costs
  • Major misconceptions about Social Security
  • Current predictions about Social Security & how long it may last
  • Simple tips to follow to make sure you're ready for retirement

Resources:

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Melissa Joy:

Welcome to the Women's Money Wisdom Podcast. I'm Melissa Joy, a certified financial planner and the founder of Pearl Planning. My goal is to help you streamline and organize your finances, navigate big money decisions with confidence and be strategic in order to grow your wealth. As a woman, you work hard for your money and I'm here to help you make the most of it. Now let's get into the show.

Melissa Joy:

Should you count on Social Security in retirement? This is a question that I got last week from a client who's a lot like you, our listeners and I thought we should talk about some Social Security literacy today, in context of recent headlines that came out this month talking about the solvency of social security. But I also just want some realistic kind of financial literacy around the subject, because I know many of our listeners are familiar with social security because you get the statements, and you're also familiar because your parents rely, at least for a portion of their income often on social security, but you probably haven't been receiving benefits yourself in most cases, and so I thought it was the perfect time to have an episode about social security and how to rely on it and how we think about that in terms of retirement. So if you don't know all the facts about Social Security. You are not alone. In fact, money Magazine did a survey of 1,500 US adults. They do this every year and when it came to Social Security, they were asking people that were nearing retirement age ages 55 to 65, and the results were not great. 41% of people who took the test failed, meaning they scored less than 54% on questions such as what is the full retirement age. We always keep an age 65 in the back of our minds because that's what it used to be for our grandparents, but that actual full retirement age has changed and transitioned over to age 67 over the years.

Melissa Joy:

Other things that people were surprised about you don't get taxed on Social Security the same way you get taxed on ordinary income or income you take out of your IRA accounts. In fact, a portion of Social Security income could be tax free, and for more of that, depending on your tax bracket, it's taxed at 85%. So there's just a lot of misconceptions out there, and it's great if we get off to the right start by just having a conversation about what Social Security might mean to you in your retirement. Now I know and I appreciate our listeners that are either current retirees or very close to Social Security age, but I also know that many of you are in your 30s, 40s and 50s, and so I will be kind of speaking to that part of the audience, because they may not have been boning up on the facts when it comes to Social Security.

Melissa Joy:

Now, the headlines that we received recently came from the trustee report on Social Security, and every year there's a report and they basically do a calculation, quote unquote, for when Social Security is, and every year there's a report and they basically do a calculation, quote unquote, for when Social Security is going to run out of money. I am going to include a link in our show notes to this article and conversation because I think it's relevant. It's worth taking a look. I'm just going to provide the summary, but the full report is on the Social Security website. No need to read it, for you know sleeping material fully, but it would be worth taking a peek because one of the things that it's worth noting is these reports tend to come out and they talk about retirement social security as well as social security disability, and they're also doing a report on Medicare and when Medicare funding would become insolvent. So the big headline sounds negative Social Security is going to quote unquote run out in 2035. If you read bylines, though, it actually is maybe getting a little better with a question mark there because the report last year said Social Security was likely to be depleted by 2034. And this year the report says 2035. So, based on economic conditions, social Security is one year better or won't run out quite as quickly.

Melissa Joy:

Now let's define what running out quote unquote means. When it comes to Social Security, if you pull out your pay stub and you have a W-2 job, or if you're self-employed and you look on your tax returns, you're actually paying into the social security system. You're paying payroll taxes, both on the employee side and the employer side, and those are not small. You're paying quite a bit around 12% and so every year there's money being paid into the system. But of course we also know in our country we have an aging population, and so what it means when we say Social Security will be running out of, kind of that trust fund is basically about 85% of the dollars that let's say that a dollar is needed to fund all of Social Security. 85 cents is accounted for with payroll taxes, and then there's 15 cents. That's kind of left over and left out to dry.

Melissa Joy:

Now, the US government has a variety of mechanisms in order to actually pay these bills, but this is a big, you know, red third rail. That is a big problem when it comes to politics, because nobody wants to be the person that's taking away Social Security benefits. It is very likely that both parties will never agree on what to do, but will all work hard to keep Social Security available, at least when you know the rubber hits the road when push comes to shove. In the meantime, though, there's likely to be a lot of bickering, a lot of grandstanding, a lot of headlines like we have just read recently, saying Social Security may be running out. There definitely needs to be some sort of results and changes, whether that is, the government just funding it based on borrowing, which would not be popular for many people, and or some sort of adjustment in the program.

Melissa Joy:

Now, some of those adjustments have happened in the past. I just alluded to one of those, which is that it used to be that the full retirement age was age 65. And way, way back in the 80s or 90s, there was an announcement that, hey, at some point in time in the future not for those of you who are about to get your social security, that are ARP members that are really, you know, going to get up in arms if something changes. But for the next generation we are going to change the rules and instead of age 65, we're going to move out the date, and full retirement age becomes age 67. So that happened over an extended period of time and that was the solution to make the social security system more solvent. So when social security was invented in the 1930s, most people on average passed away in their 60s, and now our longevity, fortunately, has extended and so people are using the system longer, which was resulting in more economic pressure for the system, just like that.

Melissa Joy:

It is likely that at some point in time there may be a change in terms of how Social Security either gets calculated, how much money gets put into the Social Security Trust Fund, etc. Etc. And I'd love to talk about some of the possibilities of that so that you can get a realistic assessment of what may be coming down the line. First of all, just look up what the inflation rate was for Social Security in terms of what you get paid from year to year. There's a quite generous inflation adjustment when it comes to Social Security and when inflation was much higher, for example, in 2022, social Security and 2023, social Security had a really big bump up. So one of the solutions could be that you would change the calculation for inflation so it wasn't quite as generous.

Melissa Joy:

Other considerations might be changes to the amount that you put into payroll taxes. So I mentioned there's about 12% put in. Half of that is from you actually and half of it is from your employer. Maybe perhaps some people have suggested that those rates might be bumped up. That would be a way to put more money into the fund. Versus the inflation adjustment would be a way to pay out more slowly. Another possibility is, for example, in last year, once you made over $160,000, not all of us have seen paychecks like that where at the end of the year, you have more than that in terms of your compensation you actually quit paying that 6% portion that you need to put in as an employee. You actually quit paying that 6% portion that you need to put in as an employee, and so one suggestion has been to remove this cap or else increase it so that you don't get a break when you're in a high earner.

Melissa Joy:

Now, of course, that break comes in, because the highest earners don't get quite as much in terms of their percentage of income of Social Security. It's a more progressive system, and so you know that might be political football, but oftentimes, when discussing who needs to pay more taxes, it would be the people that are making more money, not less, and so this might be something, or certainly has been something, that has been brought up in the past. In order to address Medicare costs, there were some additional taxes on higher earners, and it's possible that there could be new tax sources added, or perhaps that would target estate or gift taxes, which are extremely high and rare that you are subject to estate taxes, but if there were a change, that might be a possibility. Perhaps those who earn the most. If there were a means test for Social Security where you got less if you earn the most, could be something that I can imagine many of you would find unpopular, but has also been floated. And then, of course, they could go back to the well of where they've gone in the past, which is to raise the retirement age even further in terms of the full retirement age and then perhaps reduced benefits for people that are younger, so as of now, that retirement age is age 67. And so perhaps they would float the idea of making it a higher age or reducing the amount of people that can claim Social Security younger. All of these are possibilities.

Melissa Joy:

I took most of these examples from an article again in Money Magazine talking about possible fixes to Social Security funding problems, and I will include that link in show notes. Who knows what's actually going to happen. I predict a lot of fear mongering, a lot of headlines that sound very threatening and also, you know, time and again there will be these reports that say when Social Security runs out of money sounds quite negative, but make sure you read under the hood to see if things are getting a little bit better or worse, because I really like that. You know our economic conditions getting better or worse. As a predictor of you know kind of just how is it going, and I don't think this is an all or none game. Typically in the past you know the examples that we've used of changes making it more punitive if you claim earlier, making you wait longer to receive potential benefits. Those are the kinds of adjustments that you should be ready for in retirement, whether it comes from social security, the tax laws just in general or other assumptions.

Melissa Joy:

And so now I want to pivot our conversation to say well, how the heck does a financial planner tell me to still consider that I may be getting Social Security when you have these headlines that say by 2035, it may be gone? Well, in the world of financial planning we like to deal at least at my company, at Pearl Planning we like to deal with knowns and then be ready to make adjustments when things change, because we know, in retirement for people, things will change in a variety of circumstances and situations. It's not unusual for the world to change, for your personal circumstances to change, etc. And so what we do as a baseline assumption is assume that you're going to be getting social security based on what your social security statement says. Now, there aren't just assumptions about the social security system that go into that. There are also assumptions about how long you will continue to work, whether you retire early, etc. And so you know all of those are subject to change and that's okay because we're going to deal with the information that we have. That's best.

Melissa Joy:

Now if somebody comes in and says, absolutely, do not consider that I'm going to be receiving Social Security, I'd say great, not a problem, we can do that and we can back out your Social Security amounts, but for most of you, I'm going to ask you to go to myssagov to your own social security account and pull down your social security statement. If you're old enough like me to remember, they used to send these statements either every year or every few years. I think for younger people it was every five years. And so you get a nice letter in the mail and it would say oh, here's a list of all the earnings you've had over the years. It was a really good place to check to see if your earnings were being reported by your employer to the federal government. And then it would say if you retire at this age, you'll get this amount. That calculation has changed, so they give you an amount for every single year starting at age 62 and going through age 70. Just a little fun fact it doesn't just creep up in terms of the amount you're going to make every 12 months. Every single month that you continue to wait to claim Social Security gives you a little more money for the rest of your life when it comes to waiting. So I always recommend that you pull that statement.

Melissa Joy:

There is, in fact, a calculator If you have listened to our recent episode on how to retire early or how to get ready to retire early, and you are just dead set that you're going to be retiring at age 58, just picking a random number out of the air, you can put in a calculator with your other details and then put zeros for the years after age 58 in terms of your earned income and figure out how much less you would receive than the assumptions that are in your social security statement. Because I will tell you, the social security statement assumes that you're going to be receiving the same amount of income for future years that you received in the last year that you reported. And of course incomes are variable, but it's a pretty darn good estimator over time Because, as you know, you've accumulated quite a few years, if you're a listener in most cases, and so there's a lot of detail that's already kind of baked in. So we're going to put in numbers into our retirement software and I will also tell you, for most of our listeners who tend to have, you know, be earning good money, saving conscientiously and really being thoughtful in terms of their own preparation for retirement you will probably rely on Social Security less than the average American, because for many Americans. Unfortunately, social Security is going to be kind of it. They didn't have the opportunity to perhaps save as much, or just didn't choose to save as much. They didn't have. You know, just in general, people's retirement accounts are likely smaller than our average listener by the point of time that they get to retirement. So we would definitely be analyzing how much you need to rely on Social Security for your income in retirement, and for many high earners you will rely on it for a smaller percentage of your overall retirement income, but we're actually able to pinpoint what percent that is in terms of our projections.

Melissa Joy:

Now, instead of just saying you know there's going to be zero dollars for Social Security, what we can do next, after we have all of your other retirement details and I'm talking both income sources whether you have a pension required distributions from your retirement accounts, other sources of funds to withdraw from, perhaps you have a consulting gig or a smaller job or your spouse is still working We'll factor all of those things in. We also factor in your expenses and costs for a variety of things, including healthcare, your property taxes, your personal income taxes, etc. Etc. We get very granular and specific in terms of all of those things, but then we can actually go in and say, hey, what if there was a 15% haircut when it comes to Social Security? What would that look like? How would my probability of success or what percent of the time would I be okay in a variety of market conditions if that were the case in my retirement scenario? So we are able to go in then and talk you through some of the possibilities that might be more negative when it comes to retirement.

Melissa Joy:

Other scenarios that we could look at if you really want to focus on what could go wrong would include what happens if the stock market starts out really poorly right when I retire, it's always worse when it's the beginning. That's a bad market because that's when you have the most years that you need to go and kind of the biggest retirement nest egg. Or what if inflation is higher than you've already assumed? We already have inflation assumptions. We have even higher assumptions for inflation when it comes to healthcare because it's historically been higher. But we could go in and use hypotheticals to say what if things tend to be going wrong? So then you can see how kind of resilient your financial plan would be or how much you might need to change if the rules of the game were to be changed without your control. So there's a variety of kind of factors and circumstances that, with thoughtful financial planning, you can be prepared for, whatever the possibilities are.

Melissa Joy:

If you want to rely on social security less, what I tell you now if those headlines, when you read them, really freak you out is be a great saver. Do put money into retirement accounts. Consider investing it. Don't hoard it in cash so that you can keep up with inflation. This is the antidote to concerns about social security.

Melissa Joy:

I also encourage you to read beyond the headline, because so many times headlines are looking for clicks. That's just the way of the world. You don't buy a full newspaper and read it cover to cover. It's really a game where the ads need to be seen by eyes that need to have attention. Grabbing from headlines like social security is going to run out by 2035. So make sure you read below the headlines. Do have a sense of the way the overall system works.

Melissa Joy:

Do understand that while it is likely that there will be adjustments to social security over time, it is not an assumption that Social Security will be going away in all likelihood. There's a variety of possibilities and you know. Make sure that you have some rational context for how that would impact your personal financial plan before you get, you know, an anxiety attack when it comes to the stress of headlines that are negative and things like that. So that's how we really think about Social Security. I'm wondering for our listeners whether you've been thinking about the same. If not, well, this might be a worthy discussion for you to have, along with your partner of like pulling up that MySSA account so that you can see exactly what you may be receiving, and then also be thinking about the other sources of income in retirement that you are contributing to, whether it's your retirement accounts at work or accounts outside of your workplace benefits. Think about all of those and make sure that they're being just as well tended as we hope that the trustees are doing for the social security system itself. We'll keep these real-life conversations coming.

Melissa Joy:

If you see headlines where you have questions, just like one of our clients asked us about this social security, I would love for you to let us know. Feel free to email me at melissa at pearlplancom, so we can have the conversation. And if retirement's all you're thinking about, make sure to listen to our recent episode on early retirement and attend our webinar in June, which is all about how to get ready to retire early. You can find more information and sign up at our website, pearlplancom. Slash events. Have a great day. Thank you for listening to the Women's Money Wisdom Podcast. If you found value in this episode, the best way you can support the podcast is to forward an episode to a friend or leave a review. Go to pearlplancom and the podcast link to get all the resources and links mentioned.

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Melissa Joy, CFP

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