Planning for retirement beyond Social Security

By Sidney Curry

Social Security was introduced in the 1930s to provide a safety net for older Americans and combat poverty in old age. However, it was never intended to be the only source of income after retirement.

Today’s Social Security benefits replace about 42% of an average wage earner's income. For many, this percentage falls far short of what they need to maintain their preretirement lifestyle.

People fund their lifestyles during their earning years, but the same rules apply to their wealth style, which will fund their retirement years. Baby boomers and their parents depended predominantly on pensions and Social Security. However, today, Social Security can be considered only as a supplement. Preretirees will need to offset Social Security with supplemental income streams such as a 401(k).

In the end, Social Security alone is not a tenable plan for anyone during retirement. The cost of goods and services is just too high.

5 tips that empower clients to prepare for retirement beyond Social Security

Tip #1: Create a financial plan

Most Americans do not fully understand how much money they will require to maintain their quality of life during retirement. What’s more, if they do calculate what they will need to fund their retirement, most are unaware of how to get there by setting long-term financial goals.

I advise people to create a financial plan or a roadmap that explains the total amount they will need to retire. Think of that total amount as your North Star and measure your progress year by year to ensure you are on the right track.

To achieve this, I first suggest people conduct a net-worth statement using the standard assets-minus-debts formula because being in touch with their net worth allows people to measure their progress year on year. This is the only way to determine whether they are on track to reach their North Star.

Tip #2: Plan to live on a budget

A recent AARP survey reveals that one out of five adults over 50 have no retirement savings. In addition, 61% fear they will be unable to support themselves during retirement.

Remember, retirement means living on a consistent budget, so people must plan to set monthly limits for discretionary expenditures, such as eating out, groceries, gifts and clothing. The last thing anyone wants is to outlive their money, as this only opens the door to taking on debt, burdening your family or going back to work.\

Tip #3: Plan to be debt-free before retirement

Paying off debt, including mortgage debt, before retirement is critical. Today, many Americans spend around 40% of their fixed income on house payments. The main reason we see so many reverse mortgages today is that people retire with far too much unpaid debt, and their mortgage is at the very top of this list.

Tip #4: Plan for medical expenses

The U.S. has the highest health care costs in the world, and those expenses are rising. The Centers for Medicare and Medicaid Services (CMS) predicts health care expenditures will hit $6.2 trillion by 2028, representing a 50% increase from 2020.

Because medical expenses are the top reason people file for bankruptcy during retirement, researching to find the right long-term health care plan is critical. A person’s health is their wealth, so investing in a solid health and wellness plan is just as important as investing in equities.

Tip #5: Plan to save for emergencies

Establishing an emergency fund is essential to securing long-term financial stability. Without one, people eat up the financial gains realized during their earning years with expenditures such as repairs, auto and home maintenance, prescriptions and out-of-pocket medical costs.

In most cases, retirees fall back on credit cards, home equity lines of credit and high-interest loans to offset unexpected life events. A better plan is to strategically increase an emergency fund account long before retirement. Ideally, people will want to save a year’s worth of expenses, so if their monthly expenses are $6,000, then they should work toward accruing $72,000. Of course, they’ll want to place these funds in a high-yield account to reap the most gains.

Thanks to changing demographics, the future of Social Security is uncertain. As baby boomers retire, the ratio of workers paying into the system versus beneficiaries is shrinking. Over time, this shift may lead to decreased benefits or an increased retirement age.

The way to counteract the uncertainty of Social Security is thorough planning. As financial educators, our mission extends beyond simple wealth management. We empower our clients with strategies that enrich their golden years.