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Social Security is facing challenges. The Baby Boomers are retiring. The generations after them had fewer children meaning fewer taxes coming in to replace the Social Security going out to the Baby Boomers. Let’s discuss social security and retirement. 

Social Security is made up of two accounts: the Old-Age and Survivors Insurance (OASI) and the Disability Insurance (DI) trust funds. The Social Security Administration’s trustees do anticipate those accounts will run out of money in 2035. This doesn’t mean those retiring or becoming disabled won’t get money, they would just receive smaller benefits.

The trustees are imploring the government to come up with a plan now to help cushion the future of Social Security. Whether this plan is higher taxes, reduced benefits, or a combination of both, changes sooner rather than later would allow more generations to share in the needed revenue increases or reductions in scheduled benefits.

In this article, we’ll discuss what Social Security is and what you can do now to plan ahead for retirement.

What is Social Security?

The Social Security Act was first signed into law by President Franklin D. Roosevelt in 1935. It was an attempt to limit what were seen as dangers in the “modern” American life, including old age, poverty, unemployment, and the burdens of widows and fatherless children. Today, its concept is simpler: help older Americans, workers who become disabled, and families in which a spouse or parent dies.

Social Security is funded by employees and their employers through taxes on income. As of today (March 10, 2020) the current tax rate for Social Security is 6.2% for the employer and 6.2% for the employee. If you’re self-employed you’re liable for the full 12.4%. If you’re in a high income bracket, you are capped at maximum annual employee contribution of $8,537.40. This number is set by Congress and can change each year.

This money taken from your paycheck is not accumulated for you in a savings account. While you earned this income, Social Security benefits are not yours by right. Social Security Administration (SSA) puts this reminder on every statement they create:

“Your estimated benefits are based on current law. Congress has made changes to the law in the past and can do so at any time.”

Your taxes are used to pay people who are getting benefits right now. Any unused money goes to the Social Security trust funds, not a personal account with your name on it.

But Social Security was never meant to be the only source of income when you retire. You need other sources of income such as investments, personal savings, and life insurance.

How do I qualify to start using Social Security benefits?

As you work and pay taxes, you earn Social Security “credits”. In 2020, you earn one credit for each $1,410 in earnings, up to a maximum of four credits per year. The amount of money needed to earn one credit usually goes up every year. Most people need 40 credits (10 years of work) to qualify for benefits. Younger people need fewer credits to be eligible for disability benefits or for their family members to be eligible for survivors’ benefits when the worker dies.

When you claim Social Security benefits, the SSA calculates your average monthly earnings over the 35 highest earning years using a formula that results in the primary insurance amount (PIA). The PIA is the monthly benefit amount available at full retirement age. Your full-benefit retirement age depends on when you were born. Currently, the full-benefit retirement age is 66 years and 2 months.

Year of Birth Full Retirement Age
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67

You can start receiving benefits the day you’re eligible, prior to, or delay it. Your choice of timing permanently affects the amount of your benefit.

You may start receiving benefits as early as age 62. Your benefits will be reduced if you start early by about one-half of one percent for each month you start receiving benefits before your full retirement age.

You can also opt to delay receiving benefits and keep working beyond full retirement age. Delaying retirement (or retiring early but waiting to claim benefits) will permanently increase benefits by a certain percentage each year up to age 70.

Your Social Security number is what links you to your benefits. Be sure to safeguard your Social Security card and be vigilant when providing it. Identity theft is one of the fastest growing crimes today.

To see an estimate of how much you’ll receive in Social Security benefits, enter your information here: Social Security Retirement Estimator.

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How do I supplement my Social Security for retirement?

The government can’t guarantee how much your benefit will be when you finally retire, nor can it guarantee how long the program will be around. There are currently no plans for its termination, but laws can change.

You can’t rely on full Social Security benefits to be available to you when you are ready to retire. You need additional methods of income. Here are some ways you can increase your income during your retirement years.

1. Maximize retirement plans

Maximize contributions to qualified retirement plans and IRAs.

Does your company provide a 401(k)? This is a qualified retirement plan. A qualified retirement plan meets IRS requirements to be eligible to receive certain tax benefits. Take advantage.

When you set up the 401(k), you’ll determine your asset allocation, or, in other words, divvy up how your money is invested. Your age will help you determine how to do this. The basic rule of thumb is that a younger person can invest a greater percentage in riskier stock funds. At best, the funds could pay off big. At worst, there is time to recoup losses, since retirement is far ahead.

The same person should gradually reduce holdings in risky funds, moving to safe havens as retirement approaches. In the ideal scenario, the older investor has stashed those big early gains in a safe place, while still adding money for the future.

Some employers offer to match your pre-tax contributions up to a certain percentage or dollar amount. It really is free money you receive from your employer. Take advantage of this. You can contribute up to $19,500 annually to your 401(k) if you’re younger than age 50. If you’re age 50 and older, you can add an extra $6,500 per year in “catch-up” contributions, bringing your total 401(k) contributions for 2020 to $26,000. The sum of your employer matches does not count toward your annual salary deferral limit.

IRAs are not qualified retirement plans, but they allow you to save for retirement with tax-free growth or on a tax-deferred basis. The annual contribution limit for 2020 is $6,000, or $7,000 if you’re age 50 or older.

There are two different types of IRAs: Roth and traditional. With a Roth IRA, you contribute after-tax contributions so you don’t end up paying taxes on your withdrawals during retirement. With a traditional IRA, you contribute pre-tax funds (lowering your current tax bill) but end up paying taxes on withdrawals during retirement.

Which one is better for you? Many individuals have both types. But if you can only reasonably contribute to one, if you have a 401(k) through your employer, which are pre-tax contributions, then opening a Roth IRA might make the most sense for you. A Roth also offers more flexibility. You can withdraw your contributions (but not the earnings) without incurring a penalty so you have more access to your money. If you’re a long ways from retirement and you’re concerned about locking away your money for too long and want to be able to get at it if you need it, a Roth might be the way to go.

2. Get a part-time job

Many people think of retirement as the time in your life when you finally don’t have to work anymore. In reality, it’s a great time to get a job, and not just from a financial perspective. Many retirees struggle with boredom, especially those who go from full-time employment to an endless series of unstructured days. A part-time job during retirement is not only a great way to earn extra income, but also keep yourself occupied inexpensively.

A librarian, nanny, housekeeper, cashier, and office manager are some of the most common jobs retirees will take up. Insurance company Transamerica polled working retirees to find out why they end up working during their retirement years. Their responses included:

  • Wanting additional income
  • Wanting health benefits (stay active and keep brains sharp)
  • Having a sense of purpose
  • Maintaining social connections

People are living longer and it’s definitely possible to run out of your previously saved retirement income. Taking on a low-stress job is a great option during retirement.

3. Sell your home

If you own a home, you’re sitting on a sizable investment. Are you in a position to downsize? Consider selling your home, heading someplace smaller and pocketing the difference. Furthermore, if you end up downsizing to a smaller living space, you probably won’t have room for all of your furniture and belongings. That gives you an opportunity to sell some of those items and pick up a bit more cash. Consider an apartment or condo for low-maintenance living.

4. Get a reverse mortgage

A reverse mortgage is a special type of home equity loan that allows you to receive cash against the value of your home without selling it. In order to qualify for a reverse mortgage, you need to be at least 62 years old and the home must be your primary residence.

A reverse mortgage might seem like a good deal at first, since it allows you to collect income while also getting to remain in your home. And also, those payments aren’t taxable. But it’s far from perfect.

While reverse mortgages sound like a pretty nice setup, there are disadvantages.

  • Taking out a reverse mortgage means spending a significant amount of the equity you’ve accumulated on interest and loan fees.
  • Taking out a reverse mortgage means you likely won’t be passing down your house to your heirs, unless they want to pay off the loan balance.
  • If you outlive your reverse mortgage proceeds, you risk running out of money.
  • If your health declines to the point where you must relocate to a senior living facility, the loan must be repaid in full, since the home no longer qualifies as your primary residence.
  • If you die while you have friends, relatives, or roommates living with you who are not on the loan paperwork, they likely will need to find a new place to live.

Depending on your situation, reverse mortgages can be an ideal way to create an income stream without touching your retirement nest egg.

5. Surrender a cash value life insurance policy

If you have permanent life insurance your policy will accumulate a cash value over time. You typically have the option to cash out either a portion of that cash balance, or even surrender the policy for its full cash value anytime you need money.

If you’re in your retirement years and no longer need a life insurance policy, seniors who own permanent life insurance often cash it out to supplement income. Cash-outs are usually tax-free up to the amount you paid in. In other words, if you paid $200,000 in premiums over time and your surrender value is worth $200,000, the IRS won’t come after you for taxes.

Use Life Insurance to Protect Your Spouse’s Retirement

If you’re not in your retirement years yet and you’re slowly saving, consider term life insurance. A term life insurance policy replaces your income if you die during the term the policy is active. If you and your spouse are saving up for your golden years, a term life insurance policy protects your spouse’s future.

If you die unexpectedly, your income is gone. A term life insurance policy provides your spouse money to replace everything you helped provide. Mortgage payments and the costs of raising children are incredibly hard to manage for someone who goes from two incomes to one, especially on short notice.

When a spouse suddenly dies, many widows/widowers have to resort withdrawing from their retirement accounts early to pay bills. Not only are these early withdrawals typically penalized, but because the balance is less, the savings slow down. Resorting to this can have detrimental consequences on the spouse’s future retirement.

A term life insurance policy is inexpensive and budget-friendly. A term life insurance policy isn’t an investment and, unlike permanent life insurance, does not accumulate cash value. It’s simple affordable income replacement. If you have anyone who depends on your income, you need term life insurance.

» Compare term life insurance quotes: Term life insurance quotes

About the writer

Headshot of Natasha Cornelius, a life insurance writer, for Quotacy, Inc.

Natasha Cornelius, CLU

Senior Editor and Life Insurance Expert

Natasha Cornelius, CLU, is a writer, editor, and life insurance researcher for Quotacy.com where her goal is to make life insurance more transparent and easier to understand. She has been in the life insurance industry since 2010 and has been writing about life insurance since 2014. Natasha earned her Chartered Life Underwriter designation in 2022. She is also co-host of Quotacy’s YouTube series. Connect with her on LinkedIn.