(Bloomberg Business) — It’s Social Security’s 80th birthday, and while news about the program’s financial status is rarely upbeat, most Americans are glad it still exists. Women and lower-earning workers rely particularly heavily on the program.
Here’s why you need to pretend it doesn’t exist: Underfunded as it is, Social Security remains a favorite political football and a target for further trimming. At the same time, we’re living longer, and our savings need to last longer. So whatever happens to Social Security, it’s more important than ever to use all the savings strategies at your disposal.
Here are 8 ways to do that, one for each decade of Social Security. 1. Make saving simple
Just how important will your personal savings be in retirement? A chart from the National Academy of Social Insurance, a non-profit group that focuses on “how social insurance contributes to economic security,” show how the Social Security program replaces more than 50 percent of income for low-earning workers. The chart also shows how high earners would need to radically reduce their lifestyle if they need to rely heavily on Social Security income in retirement.
The Social Security Administration calculates income replacement rates for retired workers across a range of income scenarios, from those with very low income to those who hit the maximum annual amount of income taxed by Social Security (in 2015, it’s $118,500). Their calculations assume 35 years of contributing to the program and are based on Social Security’s national average wage index (AWI). For 2015, the average is $47,820.
If you’re lucky enough to be at a company that offers a 401(k), you may already be funneling money into it every pay period. Maybe you can even save enough to get all of the company match, if there is one. Saving 12 to 15 percent of your salary in a 401(k), up to the 2015 contribution limit of $18,000, is what many financial planners suggest.
That assumes you already have a cash emergency fund of three months at the very least. If your budget allows, try setting up automatic deductions from your checking account into other savings accounts, even if it’s just $25 or $50 a paycheck. And if you don’t notice that it’s gone, kick the contribution up a little higher.
If you want someone else to save your money for you, a growing number of online financial companies are offering programs to ”personalize” savings. They’re doing this with software that assesses how much you need to keep in checking to pay bills, and then automatically spiriting the excess into savings or investment accounts. Companies with products like this include Betterment and Digit.
2. Keep 401(k) savings sacrosanct
One challenge millennials face that their parents didn’t is handling 401(k) accounts while moving jobs every two to three years. Rather than roll an old 401(k) into a new employer’s plan, many young savers just cash it out, which means paying income tax on it and a 10 percent penalty.
In the year that ended on March 31, more than 40 percent of 401(k) participants between the ages of 20 and 29 cashed out all or part of their plan balance after leaving a job, according to Fidelity. Even for those between the ages of 40 and 49, the cash-out percentage was high, at 32 percent.
Barring a lottery win or a fat inheritance, starting to save early, so money can compound over many decades, is really the only way most younger savers are going to arrive at retirement age with a decent nest egg. 3. Wage war on fees
This means, first, knowing what fees you are paying for different investment accounts. Many people have no idea, particularly when it comes to retirement savings accounts such as 401(k) plans. A Department of Labor rule saying plans must provide participants with fee disclosure has made that information more easily available.
Once you find that information, your plan probably won’t note whether those fees are low, average, or high compared to similar funds. You can get a rough sense of it at brightscope.com or look into a service such as that offered by an Israeli startup named FeeX. Users create an account and connect it to their old and new 401(k) plans. FeeX automatically calculates how much, if anything, a rollover into an IRA, or a switch into a plan’s cheaper fund options, could save in fees.
I tested it out with funds I own in the Bloomberg LP 401(k) plan. It flagged the Harbor International Institutional fund (HAINX), an actively managed fund, which has an annual fee of 0.75 percent. It calculated that, over a couple of decades, I could save $10,864 by switching to a lower-cost alternative in my plan, the Vanguard Developed Markets Index Institutional (VTMNX). Vanguard’s fund charges 0.07 percent annually. 4. Check your asset mix
If you have multiple investment accounts outside your 401(k), or just multiple 401(k)s, it can be hard to know what percentage of your assets are in cash equivalents, bonds, and stocks. What is the optimal mix?
Everyone’s situation and risk tolerance (more on that in a second) are different, but the asset allocation in target-date funds gives a sense of what some large investment companies think is ideal.
For someone who is about 45 and wants to retire in 20 years, the asset mix in the Fidelity Freedom Fund 2035 is 90 percent in stocks and 10 percent in bonds. Ten years in, the stock portion will drop to 70 percent, bonds will be 28 percent, and 2 percent will be in short-term funds. At 2035, when the account holder is 65, the stock/bond/short-term funds split is 56, 34 and 11 (more than 100 percent partly due to rounding). The net expense ratio is 0.16 percent.