Financial Planning, Retirement

The Importance Of Retirement Self-Funding

12/28/16 8:00 AM

iStock_000000407668_Small-4.jpgThe Old-Age, Survivors, and Disability Insurance (OASDI) program, i.e. Social Security, has now been in place for more than three-quarters of a century. Although Social Security remains very popular with Americans, incoming reports on the long-term solvency of the federal program have been increasingly discouraging. For example, Social Security is expected to provide lower benefits relative to income in the years ahead, and the ratio of current workers to current beneficiaries is already half what it was in the 1960s, according to a study from The Hamilton Project. Further, a new assessment released this month by the Congressional Budget Office (CBO) estimated that the Social Security program will run out of money in calendar year 2029, and that benefits the following year will therefore need to experience a 29 percent reduction.

Such projections assume that no changes occur to scheduled benefit payments or the laws governing taxes and spending, meaning that there are still several ways for policymakers in Washington to address Social Security’s looming funding problem. However, it is probably not a great idea to leave one’s financial well-being in the hands of politicians. As a result, a clear takeaway for many Americans should be that they could improve their chances of a comfortable and financially secure retirement by limiting their dependence on Social Security benefits as a source of income in old age. This is especially true for younger Americans, and fortunately recent survey data suggest that many pre-retirees already recognize the importance of self-funding. A poll by T. Rowe Price, for instance, found that 51 percent of Gen-X workers and 60 percent of Millennials expect the Social Security program to go bankrupt before they retire, compared to just 28 percent of Baby Boomers.

Similarly, only 51 percent of nonretirees surveyed by Gallup said that they believe the Social Security system will be able to pay them a benefit by the time they retire, down from 60 percent in 2010. This sentiment was again found to be more prevalent among younger adults, with nearly two-thirds of surveyed Americans ages 18 to 49 expressing doubts about receiving Social Security benefits. At the same time, only 30 percent of adults ages 50 to 64 said that they do not think the Social Security system will be able to afford their benefits when they retire. As for older Americans already participating in the system, 43 percent expect that their benefits will eventually have to be cut as financial strains on the program grow. Such findings are supported by a Transamerica study released this month, which showed that 47 percent of surveyed pre-retirees are concerned that their Social Security benefits will be reduced or cease to exist in the future, up sharply from 36 percent in the 2015 survey.

Moreover, 77 percent of respondents said that they are worried that Social Security will not be there for them when they are ready to retire, with Generation X (86 percent) and Millennials (81 percent) being more likely than Baby Boomers (67 percent) to express such concerns. Among all respondents, workers most frequently cited “fully funding Social Security” as what they believe should be a priority for the new President and Congress. Encouragingly, only 17 percent of Gen-Y respondents and less than a quarter of Gen-X respondents said that they expect Social Security to be their primary source of income in retirement. Instead, a plurality of respondents from these age groups said that they plan to rely mainly on 401(k)s, 403(b)s, IRAs and other self-funded accounts as sources of income in old age. The effectiveness of these savings vehicles can be enhanced by starting early, maximizing annual contributions, and regularly consulting with a professional financial advisor to make sure that the funds are being invested optimally.



Sources: The Hamilton Project, U.S. CBO, T. Rowe Price, Gallup, Transamerica

Post author: Charles Couch