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Social Security is always a hot topic in America. The future of Social Security benefits is facing challenges due to several factors such as too many current beneficiaries as a result of Baby Boomers retiring, longer retirements, and there not being a large enough population to replace the accounts.

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?

With every paycheck you receive, you’ll see certain taxes are first taken out of it before you receive the take-home pay. These payroll taxes include federal, state, and local income taxes, federal and state unemployment taxes, and Medicare and Social Security taxes.

Social Security is designed to provide older Americans and disabled persons with a portion of the financial support needed to cover essential retirement expenses. Today, full Social Security benefits start between age 66 and 67 for most Americans. You also have the option to get reduced benefits as early as age 62 or to delay taking your benefits up to age 70 to increase your monthly Social Security income.

The decision on when to file isn’t one to take lightly. The age you apply will certainly impact the amount of Social Security you receive during retirement.

While everyone’s personal situation is different, there are three key considerations you should make as you begin to plan your Social Security filing decision:

  1. Filing early before full retirement age makes sense for some people. But because benefits are permanently reduced when you do this, it may not be the best option.
  2. Delaying after full retirement age and taking advantage of delayed Social Security credits can increase your Social Security income.
  3. Benefits for spouses, partners, and other family members are among the most powerful ways to boost household Social Security income.

Couples have the option to file for benefits based on their own work or their spouse’s. This spousal benefit has the potential to substantially increase an individual’s Social Security income if

  • either you or your spouse don’t work;
  • either you or your spouse have a limited work history;
  • there’s a vast difference between your separate career earnings.

When it’s time to retire, many couples rely heavily on their Social Security income for survival.

How much money will I need in retirement?

The rule of thumb is that you’ll need about 80% of your pre-retirement income when you leave your job. This 80% comes from the fact that you will no longer be paying payroll taxes toward Social Security, and you’ll no longer be contributing to your 401(k) or other savings plan.

In addition, you’ll save on the usual costs of going to work (the pandemic won’t keep everyone at home forever) such as new clothing, dry cleaning bills, and commuting expenses.

Example: if your annual pre-retirement expenses are $50,000, you’d want retirement income of $40,000, if you follow the 80% rule of thumb. If you and your spouse will collect $2,000 a month from Social Security, or $24,000 a year, you’d need about $16,000 a year from your savings. Bear in mind, however, that any withdrawals from a tax-deferred savings account, such as a traditional IRA or a 401(k) plan, would be reduced by the amount of taxes you pay on that withdrawal.

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Life Insurance Provides Options When Social Security Isn’t Enough

Americans’ concerns about them not receiving their full Social Security benefits when the time comes are valid. While the myth that the Social Security trust fund is going bankrupt isn’t true, it is estimated that the program will only be able to cover 79% of its obligations through 2090.

Making maximum contributions to your retirement accounts are one way to help offset the Social Security uncertainties. Another financial tool is life insurance.

» Learn more: Cash Value Life Insurance in Retirement

Permanent life insurance plans are often used to supplement retirement income. A portion of your permanent policy’s premium goes into a cash value account. The amount earns interest and steadily grows. You can access the cash value even while you’re alive. You can take out tax-free loans against the account or even make tax-free withdrawals.

In retirement, if you’re concerned about spending down your assets, a permanent life insurance policy can provide another source of cash.

Most couples have to rely on their combined Social Security retirement benefits to maintain their standard of living. But what happens to their retirement benefits when one spouse dies?

In retirement, each spouse is receiving Social Security income. When one spouse dies, the surviving spouse can choose to continue receiving the higher of the two incomes, but he or she will still only receive one income when previously the household received two.

The problem here is that many of the costs of living, such as household mortgage payments, will remain unchanged. Permanent life insurance solves this problem as well.

As long as you do not deplete the entire cash value account, which would cause the policy to lapse and terminate, the surviving spouse still receives a death benefit upon the death of the insured.

If both spouses have cash value life insurance, the surviving spouse will also still own the other policy and can access any available cash value if needed.

There are many different types of permanent life insurance. Whole life, universal life, and guaranteed universal life are some of the most common. Each type has various benefits and features.

Other Ways to Supplement 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.

About the writer

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

Natasha Cornelius, CLU

Senior Editor and Licensed 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.