Each month I hear people complain about Social Security Retirement. The most common comment I hear is, “How are people supposed to live on what Social Security pays?”
I understand their concerns but that statement indicates that they do not have a correct understanding of Social Security.
SS is supposed to “supplement” rather than “replace” retirement savings.
When SS was adopted, in 1935, the average life expectancy was lower than it is today. Those Americans who reached age 65 were assumed to have family members who would take care of them. The small amount that SS paid to beneficiaries was expected to only be enough to help them with their personal expenses. Room, board and nursing expenses were supposed to be provided by family member.
THE GREATEST GENERATION
Most historians call those who were in their teens and twenties, “The Greatest Generation.” They were the ones who sacrificed to win the war during the 1940s.
I mean no disrespect towards them, in any way. As far as I am concerned, they earned everything they got. Between surviving The Great Depression in America during the 1930s as kids and immediately fighting World War II as young adults, they earned the right to enjoy their retirement. However, things were different from what they were for their parents.
After WWII, many families were split up. Although life expectancies increased, the idea of relying on family to help during old-age was not realistic for The Greatest Generation. Fortunately, thanks to the Labor Union movement in the early 20th century, many employers established Defined Benefit pension plans after the war.
The proceeds from those plans, when combined with Social Security retirement benefits, was supposed to allow a person to enjoy their golden years in the same life-style, or better, that they enjoyed before retirement.
Yes, their actual disposable income was a bit lower than they enjoyed during their career. However, the net decrease in income was expected to be offset by a lower income tax bracket and fewer business related expenses.
Things have changed again for us Baby Boomers. Most of us cannot rely on family members to take care of us during retirement and most businesses started transitioning from Defined Benefit retirement plans, that provide a pension based on years of service, to Defined Contribution retirement plans.
Defined Contribution retirement plans are tax-favored retirement savings plans, like 401 k, IRA or SEP plans, where employees are responsible to save for their own retirements.
In theory, when SS payments are added to the payments from a person’s retirement accounts there will be enough income to allow a person to continue the life-style to which they are accustomed.
Unfortunately, many Baby Boomers are finding out, too late, that it was their personal responsibility to save for retirement during their working years. Others are finding out that the amount they were able to save is too little.
They will be required to live on SS retirement benefits alone during retirement. They are at the mercy of the whims of the politicians in D.C. and the management abilities of future political appointees.
I am convinced, that SS will be available, in some form, for Baby Boomers during our retirement. I just do not know what form it will take in the future.
As a business owner, I can continue my business indefinitely. If SS has changed drastically by the time I am eligible for retirement benefits, I can keep doing what I am doing, as long as my mind allows me to. Since my business is primarily mental, the only reason that I would HAVE to retire is if I start showing problems associated with dementia or senility.
However, I realize that not all Baby Boomers are fortunate enough to own a successful business of their own that will generate income during retirement. They are dependent on the money they were able to save during their working years.
That thought leads me to offer a couple of solutions for retirement planning for Baby Boomers. Both of them involve the use of tax-favored contracts called annuities.
The first potential problem is that the expenses associated with raising children prevented you from putting money aside for retirement in earlier years. You can use a deferred annuity to establish a tax-favored, systematic plan for saving for your retirement. The money that you save can be used to off-set any deficiencies that may be associated with SS in the future.
Immediate Annuities are used in combination with SS retirement benefits when an individual retires. In return for full control over your retirement savings, insurance companies guarantee a level of income, for the rest of your life. You can add that annuity income to what your get from SS to maintain your pre-retirement standard of living.