One common question I get from people fresh into the workforce and setting up their new 401(k)s is this: how much retirement income should I count on from Social Security? It’s not an easy question to answer because we don’t know what the political future of the United States holds.
We do know one thing: at some point in the future, the exact date depending on how you calculate things, Social Security as it is currently set up and funded will run out of money. That’s simply a fact of basic arithmetic, and most estimates of that “out of money” date put it well before people in their twenties will collect a dime of benefits.
So, in order for people in their twenties to get Social Security benefits, something will have to change. What will the change be? At this point, it’s impossible to really tell. Possibilities include individuals opting out of Social Security, a bailout from other taxes collected by the federal government, or some sort of ending of the program.
Regardless of what might happen to Social Security, I don’t view it as a safe bet that Social Security benefits, as they are today, will be around for us in forty years. In other words, when you’re calculating your retirement savings, don’t include Social Security Instead, view them as a bonus if you happen to receive benefits in your dotage.
So what should you do instead? When you decide to calculate how much you need for retirement (here’s how I calculate it), don’t include any Social Security at all – essentially pretend it doesn’t exist. This way, no matter what happens to the program, you’re covered, and if the program is still ongoing in Generation Y’s dotage, then it can be considered frosting on the cake.
This might be uncomfortable advice to some, who might have been putting away a bit less and assuming that Social Security will make up the difference. In my view, you’re making a wager that the government will bail out Social Security. If that’s a risk you feel comfortable with, then you’re making the right choice. Personally, I don’t feel comfortable with it and thus I’m planning for a retirement without Social Security.
Hopefully, a retirement with a lot of grandchildren around.