Americans are now living much longer lives than our grandparents did. Our own longevity is increasing, while the longevity of Social Security is in doubt. The 2015 Social Security Trustee’s annual report projected that the combined trust funds that help pay old age and disability benefits will run out by the year 2034. That means the funds will dry up by the time today’s 48-year-olds reach full retirement age.
This projection doesn’t mean that retirement payments will stop completely in 2034. It means that by that time, the funds won’t hold enough money to pay the retirement benefits fully; only about 75% of the benefits will be covered. So what does that really mean for us? It means that unless politicians act to adjust the current system, we may not be able to rely on Social Security getting us through our retirement years. We like to think that Congress will act sooner rather than later to initiate a solution. But for now, the current precarious position of Social Security forces us to think beyond “Plan A” and onto “Plans B, C and D.”
Shockingly enough, over half of all American households nearing retirement age have absolutely no retirement savings. So what provides most of the retirement income for about half of all seniors? You guessed it: Social Security. If aging Americans can’t fully rely on Social Security to provide for us through retirement, then we need to think about financial planning, and the sooner the better.
More and more Americans do not have access to a retirement savings plan at their workplace. While it’s clear that most of us are far more likely to save for retirement if we can do so out of our paychecks, there are still plenty of ways to save even if our employer doesn’t provide a 401(k) plan. If you're planning for retirement, consider speaking with a financial adviser about funding an IRA or a Roth IRA. An IRA, or an Individual Retirement Account, is a type of savings account geared toward retirement that offers a few tax advantages. With traditional IRAs, you can defer paying income tax on up to $5,500 that you contribute. Investors over age 50 can defer paying income tax on as much as $6,500. You can defer to pay income tax while you invest your money in your IRA, but income tax will be due once you withdraw the money from the account. A Roth IRA is slightly different, in that you do not get a tax deduction on your contributions, but you don’t pay any tax on the earnings and the withdrawals are tax-free when you’re ready to retire.
Another way to ensure you’re saving for retirement is to put aside your tax refunds every year. Save them in an account promised for retirement. In fact, by using IRS Form 8888, you can directly deposit your tax refund into a savings account, an investment account or an IRA.
If you have trouble saving your earnings, try setting up a direct deposit. You can allocate a certain percentage of each of your paychecks to go into your retirement account. That way, you can save passively and ensure your money is set aside in a safe place. If you’re wondering how much you should set aside, most financial experts are now recommending saving 15% of your income for retirement.
If you are very close to retirement age already, consider delaying your Social Security benefit. The older you are when you file for Social Security benefits, the greater your annual payment (up to age 70).
Once you have your nest egg, no matter how big or how small that egg may be, the most important and urgent next step is to protect it. Building your savings and failing to protect them is like storing your nest egg on the edge of a brick wall; Humpty Dumpty can fall at any time. In our elder law practice we've witnessed this happen to many families. Illness and injury send over half of all older adults into long-term care facilities. Often, a person admitted into a long-term care facility, such as a nursing home, feels forced to spend down their savings and even sell their house to pay the bills. With nursing homes costing well over $80,000 per year, it’s no wonder that most families find their savings drained within the first year. Don’t let this happen to you. With a little planning, you can protect your savings from the devastating costs of long-term care. In fact, even if you or your loved one is already admitted into a nursing home, there are still steps you can take to protect whatever savings you have left. We can help you protect your assets from the costs of long-term care and health crises. Contact us for a free consultation.