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Depending on Your Age, This Will Protect You from a Social Security FAIL

Depending on Your Age, This Will Protect You from a Social Security FAIL
June 12
00:03 2018

The Social Security Administration’s 2018 Trustee report contains the same dire news as last year – the benefit program will run out of money in 2034. Some look at this distant date as a reason to remain calm, confident a solution will be found. “Despite the projections on the insolvency of Social Security, I do not hold the belief that Social Security will dry up entirely,” says Ryan Repko, a financial adviser for Ruedi Wealth Management, Inc. in Champaign, Illinois. “For better or worse, social security has become hardcoded in the American DNA, after all, it is not called the ‘3rd rail of politics’ for nothing. No politician wants to be in office and have social security dry up, so something will have to change that will reform social security, to keep it intact for generations to come. That’s my humble optimistic view.”

Others deny the way the math is interpreted. “Social Security is definitively not on the cusp of insolvency,” says Glenn Sulzer, Senior Analyst in the Corporate Compliance division of Wolters Kluwer Legal & Regulatory U.S. “The media hysteria that typically accompanies the SS Trustees’ Report ignores the fact that under current tax collections, the trust fund will be sufficient to pay 3/4 benefits for 75 years. The choreographed emergency is especially misplaced with those currently 50 and older, and even with respect to employees under the age of 50.

The mathematics, however, is worse than the Trustee report makes it appear. Remember the old adage “spend the income, invest the principal”? Well, Social Security has run out of income. As it explains in its blunt editorial, Don’t Wait For Social Security’s Crisis — It’s Here,” (Investor’s Business Daily, June 8, 2018), IBD says, “For the first time in 36 years, Social Security will take money out of its ‘trust fund’ – an accounting fiction that would get you jailed for fraud in the private sector – to pay retirees. The truth is, Social Security is for all intents and purposes bankrupt.”

The commonly held view holds that solving the Social Security problem is outside the hands of the President. “This is a classic legislative issue,” says Thomas Warschauer, Professor of Finance, Emeritus at San Diego State University in San Diego California.

“The Executive Branch’s mandate is to enforce the laws set forth by Congress,” says Michael Broker, managing vice president of Trilogy Financial in Denver, Colorado. “The only thing the Executive Branch can do to affect the changes necessary to ensure the integrity of the Social Security income stream is lobby Congress to make changes to the law or tax plan to shore up the system.”

Ronald Surz, President of PPCA Inc. in San Clemente, California, however, suggest there is one thing the President can do. He says, “Trump should Tweet, “Look out!!”

Social Security remains on the cusp. Out of balance as of this year, it’s doomed to go insolvent in 2034. What can people do to help protect themselves against the failure of Social Security? Here are some practical examples of how people, based on their current age, can best protect themselves (and their children) from this imminent failure.

5 Ways Workers Over the Age of 50 Can Protect Themselves from the Loss of Social Security Benefits

#1: Start – It’s Never Too Late
Every journey begins with the first step, yet taking that first step prevent more people than you think from reaching their desired destination. “Colonel Sanders, (KFC Chicken) was turned down over 1,000 times before he finally got his start! He was 65!!! Age is no excuse,” says Joseph A. Davis, of Davis Financial LLC in Ogden, Utah. “Get a financial education, take action (3-month goals), and seek to become an accredited investor.  61% of people can’t pass this simple financial aptitude test: http://www.finra.org/investors/highlights/can-you-ace-quiz-test-your-financial-literacy.”

#2: Protect Your Saving NOW!
Losing Social Security benefits means you’ll have to rely more on your retirement savings. They’ll need greater protection. Since you’re closer to retirement, you shouldn’t delay. “Safeguard your savings NOW, since they may be all you have to draw from,” says Surz. “Most importantly, you should be protecting your savings regardless of Social Security as you transition through the Risk Zones that spans the 5-10 years before and after retirement. Target date funds and IRAs are NOT protecting investors in the Risk Zone, so the next 2008 will be much, much worse. Don’t let this happen to you.”

#3: It’s OK to Play Catch-Up
Face it, you don’t want to suffer the indignity of Blanche DuBois, who “always depending on the kindness of strangers” in A Streetcar Named Desire. Social Security (and any pension plan, for that matter) requires you to believe the promises of others. This reliance can no longer be counted on. “Realize the burden of retirement has been shifted squarely on your shoulders,” says Lou Cannataro, a partner at Cannataro Park Avenue Financial in New York City. “Not only is Social Security in trouble but your pension, if you even have one, maybe be frozen as well. You must take advantage any way possible to save/invest tax advantaged dollars. You should look to utilize the catch-up feature in your 401k assuming you are maxing it out already while and create a back-door Roth IRA. If you own your own business, deploy the most effective retirement plan available based on your company’s particular situation. Quite often the business owners’ retirement plan is not customized and does not provide the most tax leverage available to the business owner.”

#4: Work Longer
This may not be the most favorite option, but it’s not the worst. It offers the double-barreled bonus of saving more and allowing that savings more time to grow. “Plan on working until age 70,” says Dennis Doble, a partner at Doble LeBranti Financial Group in Burlington, Massachusetts. “I have no idea what changes are in store for Social Security, but in my opinion, they will continue to push out the Full Retirement Age for people to collect full benefits until they are on more solid footing. And realize that you may lose some ‘career control’ when it comes to your 60s, so best to save now. When it comes to people in their 60s, I’ve seen more and more people forced out of the workforce prematurely because of their high costs vs. being able to hire two younger employees for the same job.”

#5: Cut Spending
For many, this represents the option of last resort. It’s also the surest method to guard yourself against falling prey to the worst-case Ponzi-Scheme traits of Social Security. “If you’re closer to retirement age, the best way to protect yourself against the possible loss of Social Security benefits is to play some defense and cut as much spending as possible from the cash flow,” says Broker. “If an expense is unnecessary to support your preferred lifestyle, cut it out. While you’re still working, take the money you cut out of your expenses and use it to pay down debts to decrease the monthly need later.”

5 Ways Workers Under the Age of 50 Can Protect Themselves from the Loss of Social Security Benefits

#1: Save Early
This goes without saying. It allows you to take maximum advantage of the time you have. “The impact on younger workers may include a slightly higher tax rate, which will interfere with their retirement savings goals, and deferred retirement (age 70 or even 75) will become much more common,” says Warschauer. “Starting savings younger is a difficult but necessary step. Most younger people save in steps (first to buy a house, then for kid’s education, then for retirement. Those sequential savings won’t work as well. It will be more important to start retirement savings younger competing with other savings goals.”

#2: Take Full Advantage of Corporate Retirement Plans
In many cases, this can mean free money as a result of the company match. “Employees should not be exclusively dependent on social security benefits in retirement, if they can help it,” says Sulzer. “Employees with access to employer-based retirement accounts (401(k), 403(b)s, 457(b)) should fully participate in the plans and defer as much as possible. Younger employees need to be advised of the opportunity cost of not deferring or participating in employer provided plans.”

#3: Maximize Your Contributions
It’s not just saving early, it’s saving often. And by “often,” we mean as much as possible. It’s time to do some “spring cleaning” of your everyday expenses to see what you can cut back today to insure a more pleasant tomorrow. “Take a look at your cash flow and set aside as much as you can to create your own retirement income stream to supplement any reduction or loss of benefit from Social Security,” says Broker.

This is especially true for those in their 40s. “Workers under the age of 50 are typically nearing the peak of their careers,” says Repko. “They should ensure that they are maxing out their qualified retirement plans, to the extent possible, if they are concerned that a reduction in social security benefits will have a severe impact on their retirement. Employees with a 401(k) or Roth 401(k) option can contribute up to $18,500 per year, and anyone with earned income can contribute up to $5,500/year (or the max of their earned income if they didn’t earn $5,500/year) to an IRA or Roth IRA. Any of these qualified accounts provide sheltered tax benefits to help boost one’s savings.”

#4: Invest for the Long-Term
It’s not just enough to save and save a lot. That savings needs to be placed in investments most appropriate for the long-term time horizon workers under the age of 50 have until retirement. If you’re looking for a way to protect yourself from losing your Social Security benefits, Surz says, “One answer would be to increase risk because you’re going to need more to compensate for the loss of Social Security, but the better answer is to save more.”

#5: Educate Yourself
People make financial mistakes when they don’t know what they’re doing. This occurs most often because they think they know what they’re doing. Joseph Davis says, “Get a financial education, read books, podcasts & take action. We like a trifecta investment style of equities, real estate & business. Plan on trying to replace 100% of your income. Don’t shoot low.”

5 Ways Parents Can Protect Themselves from the Loss of Social Security Benefits

#1: Educate for Self-Reliance
The current curriculum fails to adequately prepare students to survive financially on their own. Indeed, there’s an expectation that “an adult” will always be there for them. That’s simply not true. The “adult” of Social Security may no longer be there. “Educate them on the possibility and the consequent need to save more & work harder,” says Surz.

If they can’t rely on the school system, what can parents do? “They can potentially plan for the worst-case scenario – that social security will not be available,” says William Davis, a financial planner for Ameriprise Financial in Yardley, Pennsylvania. “That entails an entirely new way of thinking, planning, and educating our youth on approaching their personal finances. Personally, I believe that the educational system has an obligation to teach our children how to prepare for their own financial security – we need to be our own financial advocates.”

Unlike school, parents can delve into specifics relevant to the child and the family. “Talk about finance, planning, money and investing as often as you can,” says Cannataro. “Instill good saving /investing habits. We need to realize there is an enormous gap in the transfer of knowledge and experience regarding finical planning in this country. 70% of inherited net worth is lost by the next generation and 90% by the third generation. Do not perpetuate this breakdown…talk. We have an established proves to bring in our clients’ children at different ages in their lives. The goal is to create the next generation of savers and investors who realize they cannot rely on SS nor their company for retirement.”

Come to think of it, isn’t relying on the public school system the educational equivalent of the “depending on the kindness of strangers” problem we see with Social Security? Perhaps its best for parents to take their children under their financial wing and have them hop aboard for the ride. “Involve your children along your investment journey,” says Joseph Davis. “They will not learn this stuff in school. It’s not a coincidence that some of the wealthiest people in the world tend to have children who also become wealthy. Is it luck? In part – but a lot of children grow up in their parents’ businesses & learn the ropes at a very young age. Don’t shelter your kids from your own investment dreams!!”

#2: Unleash the Power of Compounding
One of the first thing a child should learn is Ben Franklin’s adage “a penny saved is a penny earned.” “As in all cases with saving, the advantage goes to the young because they have decades to ramp up their savings rate to compensate for any potential loss of their Social Security benefit,” says Repko.

#3: Open a Child IRA
What’s the best way for kids to learn the power of compounding? “Parents could open IRAs for their children,” says Sulzer. For more information on Child IRAs, including how parents can establish them, how family-owned business have the greatest advantage in using them, and how financial professionals add value to their clients through them, go to www.ChildIRA.com.

Don Wede, President Heartland Funding Inc. in Spring Valley Illinois says opening a Child IRA is a “great idea. Parents can teach the children financial responsibility at a young age. They can have them set up a self-directed Roth IRA.”

“Parents with children under the age of 18 should begin educating their children on the value and sheer necessity of saving from a very early age,” says Repko. “Although it is not my belief that social security will evaporate, I do believe we could see a very real possibility of reduced benefits. Thus, parents should encourage their children to open an IRA, or even better, a Roth IRA when they get their first high school or part-time job.  The advantage that young children will have is time, and time is what allows the miracle of compounding to work.  If a 15-year-old child could divert some of their earnings to a Roth IRA, every cent would grow tax-free when they take it out at retirement 50 years later. This could certainly help offset a reduction in Social Security benefits.”

#4: Give Them Responsibility
Undergirding all these methods lies the idea of helping children become financially literate. The most effective way of learning, of course, is by doing. “The best thing a parent can do for their children is to empower them to take responsibility for their own financial future and not rely on the government or anyone else to provide financial freedom,” says Broker. “Explaining your financial decision-making process and modeling savings habits as early as possible for your kids will get them started off on the right foot. Help them set up a retirement account such as a Roth IRA or other savings vehicle as soon as they have their first job, so they are used to setting some of their check aside from day one.”

#5: Avoid (Student) Debt
Lastly, if there’s one major obstacle we see in a young adult’s ability to save for retirement, it’s student debt. This need to be addressed, if it can. “Parents need to be taking steps, when feasible, to insure their kids don’t end up with huge student debt,” says Warschauer. “Young people starting in jobs with large student debt will simply not be able to afford the house, savings for their children’s education let alone for retirement.”

No one need place themselves in a “Blanche DuBois Scenario.” Each has the ability, no matter their station in life, to seize control over their own destiny. This applies to retirement as much as anything else.

Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

 

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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