The retirement system in the United States is one of the most important things to understand for retirement planning purposes. The Social Security Administration provides retirement benefits to millions of retirees, disabled workers, and families each year. What many people don’t know is that Social Security retirement plans are under a lot of pressure, and retirement benefits might not be around for future generations.
This blog post will provide you with an understanding of social security to make an informed decision about your retirement plan options.
The Social Security Administration provides retirement benefits for people who can no longer work due to retirement, disability, or death.
It’s important to understand that the retirement system is based on a pay-as-you-go system. This means that retirement benefits are paid by taxing the current workforce to distribute those funds to retirees and other retirement system beneficiaries.
In the retirement system, these contributors are also known as “covered workers.” They pay a percentage of their covered earnings subject to retirement payroll taxes. Those earnings include compensation from wages, salaries, self-employment income, and net profits of a business or farm.
Covered workers must earn a certain amount of their retirement income from work, or they won’t be able to claim retirement benefits at all.
There are two types of retirement plans: defined benefit plans and defined contribution plans.
- Defined Benefit Plans: A defined benefit plan guarantees a particular monthly benefit that is generally based on income and service. The Pension Benefit Guaranty Corporation (PBGC) insures most traditional defined benefit plans up to a specific limit.
- Defined Contribution Plans: On the other hand, a defined contribution plan does not guarantee a certain retirement amount of benefits. These funds are usually invested on behalf of the employee. The value of the account may vary depending on the value of the investments.
Moreover, you can begin receiving Social Security retirement payments at the age of 62. When you reach full retirement age, however, you are entitled to full benefits. Your benefit amount will increase if you wait until you reach full retirement age, which is 70 years old.
According to the Social Security Board of Trustees’ 2021 annual report, the trust funds that administer retirement, disability, and other Social Security payments will run out of money by 2034. This is a year sooner than the trustees anticipated in their 2020 report.
This does not mean Social Security will cease to exist; rather, it means the system will deplete its cash reserves and will be able to pay out just what it collects in Social Security taxes year after year. If this occurs, Social Security will pay approximately 78% of retired and disabled workers’ payments.
This is because most retirement and disability payments are indexed to the national average wage index. The amount of money collected in Social Security taxes would be enough to support about 78% of this index.
Knowing this, it is important to invest in retirement plans that can supplement Social Security. As the years go by and more people begin filing for retirement benefits, the effect on the retirement system will be more substantial.
People who are retirement-aged and looking to invest can look into other options that may provide them with a higher return. These investments could include retirement accounts, such as the IRA or Roth IRA.
For Roth IRA, you contribute after-tax cash and your money grows tax-free. You may generally make tax- and penalty-free withdrawals after age 59½. With the traditional IRA, you typically make contributions with pre or after-tax dollars. It’s here that your money grows tax-deferred, and withdrawals are taxed as ordinary income.
The future of Social Security is unclear. It’s important to take control and learn about personal finance fundamentals now to make informed decisions if changes are made.
To ensure that it provides a comfortable future for yourself and those around you, we recommend purchasing our personal finance fundamentals courses so that you can be better prepared with knowledge about how to save money, spend wisely and invest more intelligently. Visit our website today if you would like assistance enrolling or have any questions.
You hold the retirement of your future in the palm of your hands. Be smart and take control now to ensure you aren’t left empty-handed.