Social Security benefits are one of the great unknowns when it comes to retirement planning. Baby Boomers don’t have much to worry about since the Social Security trust fund isn’t expected to run out of funds until sometime after 2027, but what about the younger generations? Should they be taking Social Security benefits into account when they formulate their retirement savings goals?
Even if Generation X and younger don’t have access to full benefits, there will be some money left in the system, even if it means individuals receive 75 percent of their current expected benefits instead of 100 percent, said Robert Henderson, president of Lansdowne Wealth Management, LLC in Mystic, Conn.
“For younger people, if somebody is 20 years or more away from retirement, it’s not that I don’t think Social Security is going to be there because I do, but it is so difficult to predict what the amounts are going to be,” he said. “A lot of things can change with Congress and our economy over 20-plus years. In addition, a lot of things can change with individuals’ circumstances, like how much they work, how much they earn and the types of jobs they have.”
Because there are so many factors to take into consideration, if someone is under age 45 Henderson said he may not incorporate Social Security benefits into their retirement plans.
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“There’s no way of knowing this far out what that benefit is going to be at that point,” he said.
According to the Social Security Administration, Social Security will make up about 21 percent of an individual’s retirement income, leaving the other 79 percent to be made up with personal savings, defined contribution and defined benefit plans.
It is hard to throw out a generalized number when it comes to Social Security benefits. Everyone makes a different amount of money and works a different number of years.
Most individuals who work with financial advisors make more than $100,000 a year. Higher income people will typically receive a lower replacement percentage from Social Security benefits than lower income workers because that is how the system was initially set up, Henderson said.
If someone made $150,000 a year before they retired, they can expect to receive between 15 and 20 percent of their pre-retirement income from Social Security benefits. If they are married, their spouse also is entitled to benefits so that figure could increase to as much as 25 percent.
Another problem with Social Security benefits is that there are so many rules governing who will receive what that individuals really need to know what they are entitled to.
See also: 6 lessons for a successful retirement