A recent announcement by Social Security alerts us that Congress has less than a decade to fix Social Security before the program runs short of cash, threatening a sharp cut in benefits for nearly 60 million retirees and family members, according to a government report.
Should Congress not act by 2035, the retirement trust fund will run dry and Social Security may not have enough money to pay out what it owes. Most policy pundits predict lawmakers will act to avert the catastrophe.
If Congress, however, does nothing, forecasted payroll taxes will continue to flow to Social Security enabling funding of 79% of promised benefits.
Do not worry about the future of Congress’s Social Security funding showdown. Instead, think about what you can control.
There are things you have no control over when it comes to our finances:
- How the market performs
- Changes in tax law
- Changes to the retirement system
- Future of entitlement programs like Social Security
- Inflation
- Costs of health care
- Your health and your spouse’s health profile
- Your family and your spouse’s family longevity history
Focusing on what you can control is one of the best ways to manage your money. Investors sometimes fail to recognize the aspects of their financial situation that are within their control.
I stress in retirement seminars the two most important factors you can control are when you retire and the assets you have accrued in your defined benefit retirement plans like the Thrift Savings Plan and your emergency fund.
There is a world of difference in the time horizons for your retirement plan and emergency fund.
Retirement plans need a long-term focus. Decide what percentage of your portfolio to allocate across asset classes like equity and fixed income. This is a key step towards reducing your exposure to market moves. Investing carries risks, but inherent market risk is different from diversifiable risk. Diversifying within asset classes and across geographic regions and investing styles can help by adding a negative correlation.
Emergency plans need a short-term focus. This is because your emergency plan has to pass the liquidity test. Money market funds, certificates of deposit, and high-interest savings accounts are good places to park your emergency fund.
News about the Social Security funding projected forecast may stir some to think of accessing their Social Security retirement benefits as early as possible. Many people want what’s theirs before the money might run out. After a career of paying Social Security taxes, it’s understandable. Instead of trying to time your benefits, focus on longevity protection — or protection against running out of money in old age.
Some believe the only reason(s) to claim Social Security before age 70 is poor health and poverty. This is especially true for those who have not saved enough for a comfortable retirement.
Every month you wait to claim Social Security adds more money to your monthly income. Somewhere between the ages of 62 to 70, you will find the best option depending on your situation.
Revisit each year when to take your Social Security retirement. If you do not need additional income at age 62, see what happens at age 63. Once you exceed your full retirement age, you can even elect to receive up to six months of retroactive benefits in a lump sum.
For those who can afford it, the guaranteed enhanced return obtained by waiting to age 70 changes future retirement income on a monthly basis. Remember, your wealth, education, and health may tilt the odds of living longer.
Think also about the possibility of lifestyle inflation, as a scenario. Maintaining pre-retirement expenses during retirement may be a challenge.
You will have to eventually start taking the Required Minimum Distributions (RMDs) from your retirement plan. Consider accessing your retirement plan assets before your RMDs are due to pay Medicare premiums and other expenses. This will reduce the retirement plan balance subject to the future RMDs.
