You might also be interested in these articles:
You hear it often from young people: "I'm not counting on Social Security to be there for me."
If Social Security is killed off before today's younger workers get a chance to use it or use much of it, they need a plan. And quick.
The projections are not that Social Security will be gone by the time today's 30-year-old is 65. But, the projections are for a gradual demise, if nothing changes. What's expected is that 27 years from now, there will only be enough revenue to cover 78 percent of promised benefits. It goes down from there.
There's always the worry that with 27 years to fix the problem, Congress will slash benefits.
What would it take to get along without them?
The answer to that question, if you try to calculate it, may not be as much as you think. Sure, saving enough money to fund a retirement without all or most of your expected Social Security benefits would be tough, but, in some cases, not impossible. There are ways you can do it.
The formula for planning a retirement without Social Security is simple: "You should save until it hurts, " said Cassandra Toroian, the founder and chief executive of Bell Rock Capital, an investment firm with an office in Boca Raton.
"You should use your 401(k) plan and make sure you are taking advantage of the tax benefits associated with that and combining that with (other) savings," she said. "It's not either-or. It's both."
How much should you save?
Vanguard, the mutual fund giant, ran some scenarios.
Scenario One -- Full Social Security benefits and nothing else
Assume a 30-year-old worker has a $30,000 annual salary, that his or her pay goes up by 1 percent a year and that he retires at age 67, which will be the Social Security retirement age for that group. According to calculations by Vanguard investment analyst Maria Bruno, at retirement this worker will have a $43,352 annual income. His annual income from Social Security will be roughly $14,808 in current dollars. That means Social Security will replace about 49 percent of his income.
The question just has to be asked: Where will he get the other half?
Next, look at another worker. This 30-year-old begins with a $50,000 salary. He'd end his career with a salary of $72,254 and draw an annual income from Social Security of $21,204. That means Social Security replaces 42 percent of his final salary.
The higher-income worker will take an even bigger pay cut at retirement than the lower-income worker, if he only has Social Security to rely on, than the lower-income worker.
Scenario Two -- Full Social Security and income from investment portfolio
No matter what happens to Social Security, you should plan to live on about 80 percent of your pre-retirement income, Bruno said.
You know Social Security won't cover that amount, so it's up to you.
Let's assume you save your money over the years and earn a conservative rate of return of 4 percent, after inflation.
When it is time to retire, you withdraw 4 percent a year, which is generally considered a safe rate to fund a retirement.
Using those numbers, if Social Security benefits remain as they are today, the worker earning $30,000 a year at age 30 would have to save 12 percent of his income throughout his working life. That is, he uses a combination of withdrawals from his investment portfolio and Social Security to generate 80 percent of his pre-retirement income.
Next, let's look at someone who has a $60,000 salary at age 30. He would have to save 15 percent of his income through the years to have about 80 percent of his income at retirement.
Scenario Three -- Partial Social Security and investment income
If Social Security benefits are reduced to 75 percent of what they are today, the needed savings level would be 17 percent for both the $30,000 worker and the $60,000 worker.
Scenario Four -- No Social Security and only investment income
Here's the real kicker: With no Social Security at all, both those workers would need to save 30 percent of their incomes to have an adequate replacement for about 80 percent of their pre-retirement income.
"If you're the most skeptical about Social Security, this shows you the real test," Bruno said.
Does the idea of saving 12 percent, 15 percent, or even 30 percent of your income sound too difficult?
It is hard, but here's a stair-step strategy to get you to a good savings level.
Start where you can. Commit to increasing the percentage with each pay raise. A growing number of employer-sponsored retirement plans have automatic increases built in.
If you save 5 percent now and you get a 3 percent raise, save 6 or 7 or 8 percent next year, for example.
That way, you will be increasing your savings contributions over time, without taking a big hit to your income today.
Copyright (c) 2010, Sun Sentinel, Fort Lauderdale, Fla.
You might also be interested in these articles: