Most of us commonly think of Social Security as almost synonymous with retirement — but it was never planned to be.
When it was established in the 1930s it was set up to be primarily an anti-poverty program—or “social insurance”—dealing with old age, poverty, unemployment, and the burdens of widows and fatherless children.
The stock market crash of 1929 and the onset of the Great Depression collapsed incomes across the board and wiped out the savings of many of the elderly. The government responded by implementing Social Security to remedy many of these economic ills.
Strictly speaking, it was never intended to be a retirement plan as much as a supplement for lost wages.
The Depression is now deep in the history books and with it, the original intent of Social Security. Today it’s mostly seen as a retirement plan.
But is it really?
Why you can’t rely on Social Security alone
For millions of people, Social Security will be either the biggest portion of income they will receive in retirement, or even the only income they have during their retirement years.
Can we rely on it to that degree?
Most people will fall somewhere in between, and that doesn’t sound at all like a plan that can be relied upon to insure a comfortable retirement. That’s why we all need to have other sources of income in place.
Think of Social Security as just one part of your retirement planning
We should never ignore Social Security as an income source in retirement—we just shouldn’t count too heavily on it for planning purposes.
Once again, according to the Social Security Administration, the the average monthly benefit is $1,230, or just about exactly halfway between the $1 minimum and the $2,513 maximum.
With the cost of living being what it is today that’s a true supplement and little more.
One of the complications we have with developing a more balanced approach to retirement planning is that relatively few employers have traditional defined benefit pension plans any more. That eliminates what was once a reliable component of retirement income.
In a very real sense when it comes to retirement planning, we’re truly on our own.
Even though retirement is an event that’s decades away for many, when it comes to retirement planning, there’s a definite element of carpe diem, or seize the day. As in this day—we need to be working now to be ready for a retirement that will be mostly the product our own efforts.
Building other sources of retirement income
Since we know that we can’t rely on employers and the government to provide even the majority of our retirement income, we should have all the incentive we need to make our own arrangements.
The two primary alternate income sources can be either self directed retirement plans or some form of post-retirement employment or self-employment. The combination of both would be ideal. (Work in retirement sounds like an oxymoron, but I’ll show you why it could be important in a moment).
Self-directed retirement plans have become a retirement planning necessity, and for a number of reasons they can be even better than traditional company pensions:
- They’re generally tax deductible, which is an outstanding benefit while your saving;
- Employer sponsored plans often include an employer match that’s like found money;
- Since they’re self-directed we can take on as much risk—or risk avoidance—as we choose;
- Unlike traditional pensions, we always know what we have in self-directed plans;
- There’s less chance that a 401k plan will be squandered or poorly invested as sometimes happens with pension funds;
- By maximizing contributions it’s possible to build a plan that dwarfs a traditional pension plan.
When it comes to self-directed retirement plans, we need to plunge in with all the financial resources we have.
Now, let’s get back to that working in retirement thing.
There are several strong reasons why you might want to have a work plan for your retirement years:
- Working past retirement age is a way to preserve and extend retirement savings for years;
- Working can provide some insurance against a less than expected retirement portfolio, or even a post-retirement stock market slide;
- Employment income can form the third part of a retirement plan that includes Social Security and retirement investment income;
- By working and delaying collecting Social Security until age 70 you can increase your monthly benefit by up to 32%.
Most of us think of retirement as a complete end to work, but as you can see there are compelling reasons why you might want to delay full retirement by at least a few years. At a minimum, having some sort of post-retirement employment/self-employment will keep open some options that will be good ones to have.
The low numbers on Social Security benefits shouldn’t be seen as a source of concern nearly as much as we should use them as a wake up call to make our own arrangements for retirement income—as if we need any more incentive…