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When it comes to income in retirement, one looming question confronts most individuals: How much money is enough?
While the answer to that question in never black-and-white, recent headlines about the solvency of Social Security could be injecting more fear into that dilemma.
Last week, the Social Security Administration released its annual trustees report. Its new projections moved up the date for when the fund that pays retirement benefits would be exhausted to 2033, at which point 76% of promised benefits would be payable.
Lawmakers are expected to address the program’s solvency at some point. But the question is when. And, when they do, the changes are generally expected to include benefit cuts, higher taxes or a combination of both.
Polls show many Americans already have shaky faith that Social Security will be there for them when they retire.
One recent survey from Nationwide found that 71% of Americans are afraid Social Security will run out in their lifetimes.
Another survey from Transamerica Center for Retirement Studies found that 73% of workers agree with the statement, “I am concerned that when I am ready to retire, Social Security will not be there for me.”
Many Social Security experts say it is unlikely the system will vanish altogether in our lifetimes. After all, in 1983 when the last major reforms were enacted, the system was just three months away from going broke.
However, instead of waiting for changes that could affect your qualify of life in your later years, experts say the best approach is to have a plan to build up your retirement income in other ways.
Have a plan
As simple as it sounds, the first step is to have a retirement plan.
“Most people don’t have a plan,” said Joe Elsasser, a certified financial planner and president of Covisum, a Social Security claiming software company in Omaha, Nebraska.
“In order to stress-test your plan, you have to start with a plan,” he said.
Assess whether you are reasonably on track with a full Social Security benefit, then ask yourself what would happen if cuts were put in place, Elsasser said.
Also, don’t underestimate the positive effects of working a year or two longer or saving more, he said.
Ted Jenkin, a CFP and CEO of Atlanta-based Oxygen Financial, said he tells people to run their plan without using income from Social Security. That total tells you how much you will need on the day you retire in order to maintain your standard of living.
That sum also shows you how much you need to save in your 401(k) plan or individual retirement accounts in order to retire successfully.
You may not need to max out your 401(k) once you have figured out how much you need to save and what return you need to earn on that money in order to maintain your standard of living, Jenkin said.
Safeguard your income streams
Any changes that happen to Social Security will likely not affect current or near retirees. But younger generations could feel a pinch from any changes.
Consequently, it still pays to delay claiming benefits if you are approaching retirement and are in good health, Elsasser said.
By getting checks too early, retirees could be giving up 25% to 30% of that monthly income, depending on their full retirement age (generally 66 or 67, depending on the year in which they were born).
Also consider shoring up other ways that could boost your income in the event that benefits are reduced or other unexpected expenses crop up.
Dividend paying stocks are often considered a source for that.
However, other investments can also diversify your income streams, Jenkin said. By acquiring rental properties now, you could create a passive income stream later on. To be sure, those investments are not guaranteed and come with risks, he said.
In addition, investing in or running a business could help bring in more monthly income. That could be a side hustle you run from your house. Or you could become a part-owner in a business that brings in a reliable flow of money.
Consider an annuity
While delaying Social Security retirement benefits up to age 70 is the best annuity money can buy, Elsasser said, there are times when you may want to consider professional products where you pay a lump sum and get a steady stream of income over time in return.
“Annuities can be a good supplement to Social Security for people who do not have a lot of guaranteed income,” he said.
But with many annuity products out there — and the various motivations to sell them — understanding and investigating what you are buying is key.
Be sure to inquire with an agent who is selling you an annuity about the commission and total fees they will earn from selling the product and how that would compare to what they would make from managing your portfolio in a more traditional way.
For many annuities, the advisor will make a similar amount compared to what they would if they were just managing your portfolio, Elsasser said.
When used correctly, annuities can help you create your own pension, Jenkin said.