Your Social Security Benefits

Don't Rely on Social Security Alone When Planning for Retirement

After years of giving to the government, Social Security is your chance to finally get something back. When you reach retirement age, your monthly government check will be based on an average of your lifetime earnings and the number of years you worked. Although you most likely will one day collect some income from Social Security, it probably won’t be the same proportion of your retirement income as it was for your grandparents or even your parents. That’s because when Social Security was launched, more than 40 workers supported each recipient. As the population has aged, Social Security expanded to include more benefits and more recipients. Analysts say that, in order to survive and continue providing benefits, Social Security will have to be reformed in the coming years. That means you’ll probably have to work longer to get your benefits, and those benefits may be proportionately lower than they are for retirees today.

Even though Social Security will continue to play an important role in your retirement plan, it’s important to remember that the monthly check is only intended to supplement your retirement income. Your retirement plan should include other sources of income such as company pensions and personal savings and investments.

Employer-Sponsored Retirement Plans

Pensions make up a small percent of the average retiree’s income and this percentage is expected to drop as more companies look to trim costs. Many companies are switching from defined benefit plans — which guarantee fixed payments for life, based on years of working — to defined contribution plans, placing more of the retirement funding responsibility on employees. The combination of Social Security and employer pension plans typically replaces no more than 60 percent of prior income upon retirement. Thus, building up the third source of income — personal savings and investments — will be essential to help you pick up the slack.

Closing the Retirement Funding Gap

A well-thought-out strategy for building your own savings and investments for retirement can help make up for any funding shortfall. Here are some smart ways to help accumulate a stronger portfolio for your future:

• Contribute the Maximum to Your 401k Plan
  Contributions and income earned in a 401k are tax-deferred until you take the money out. If your company offers a 401k plan and matches your contributions up to a certain amount, you should contribute the full amount that the company will match. If you get 50 cents for every dollar you invest, that’s a 50 percent increase right off the bat.
  

• Invest Money in an IRA
  Your investment earnings are tax-deferred — regardless of your level of income, you don’t pay taxes on earnings until they’re withdrawn. You can use your IRA investment to help you buy a home or pay for higher education. You can make penalty-free withdrawals from your IRA without incurring the 10% premature withdrawal/federal tax penalty if the distribution is for a qualified first-time home purchase ($10,000 lifetime limit) or for qualified higher education expenses. And many people don’t realize it, but with a traditional IRA they may still be eligible to deduct their IRA contributions from their annual income taxes (see your tax advisor for details). The new Roth IRA allows nondeductible contributions of up to $2,000 annually, but all withdrawals are tax free - including investment earnings. Withdrawals are tax free after five years and upon attainment of age 59 1/2, upon becoming disabled, or after the death of the contributor.
  

• Invest More Aggressively
  Don’t limit your retirement portfolio to low-yielding bond and money market investments. They typically don’t provide sufficient long-term growth to stay ahead of inflation and taxes. Instead, invest a portion of your assets in growth-oriented vehicles that invest in stocks. Just a few percentage points can make a big difference to your investment returns in your retirement portfolio. Investing $100 a month for 30 years at a hypothetical 6 percent annual rate of return will result in $100,954. The same monthly investment averaging an 8 percent rate of return will grow to $151,258 in 30 years.* Once you understand the various sources of retirement income available, take some time to review the makeup of your own plan and where you may fall short. You may need to make some adjustments now to ensure a comfortable lifestyle after retirement. Your Financial Professional can help you develop a plan and select appropriate investment strategies for your retirement funding needs.
  
  *The returns used in these examples are hypothetical, do not account for taxes and do not represent the returns of any specific investment.

Financial Planning and Investment Services

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