William Lako: How much should you rely on social security for your retirement?

The Social Security Administration has estimated in their 2022 annual reports that they will be able to pay scheduled benefits on a timely basis until 2034. Once the fund's reserves are depleted, continuing taxes on income should be sufficient to pay 77% of scheduled benefits. Of course, the government could change the program, taxes, or both, which would alter that trajectory.

While most people expect changes to the Social Security program, the reality is that Social Security was always only meant to replace a portion of your retirement income. For most, Social Security only accounts for 33% of retirement income, which is why it is important to save for retirement.

Still, investors want to know, what role should Social Security play in their retirement planning. Unfortunately, there is no magic formula. I believe that it all depends on your spending. You can only do three things with your money: pay taxes, save it, and spend it. For a quick back-of-the—napkin estimate, look at your income tax return for what you paid in taxes and what you've saved for retirement. That leaves what you spend.

The process of developing a financial plan is to prepare for the day when spending exceeds income, meaning retirement. There are few — if any — guaranteed sources of retirement income. Pensions are few and far between; annuities are only as good as the insurance company backing them; cash is subject to inflationary pressures, and Social Security. The rest of your spending comes from your savings, such as your IRAs, 401(k), or brokerage accounts.

When developing a financial plan, I recommend using different variables to account for unknowns like increases in taxes, higher inflation, market performance, selling or keeping an asset like a business or home, longevity, and even the solvency of Social Security. By running projections for different scenarios, you can get a picture of how much you are relying on Social Security for your retirement income. If you're uncomfortable with your level of dependency, that's an indication to make a change, whether it is how much you save today or a change to your retirement lifestyle.

As you approach 62 — the earliest you can claim benefits — you again have more decisions to make. You can take benefits at a reduced amount or delay them up until age 70 when you can maximize them. Again, there is no magic number that works for everyone. However, I generally recommend taking Social Security benefits before supplementing your retirement income needs with assets from your portfolio. The more you need to withdraw from your portfolio means you'll need more fixed-income investments per the Ten Year Rule. That can result in missing out on the growth traditionally found in equities. Equity assets in your portfolio should grow faster than the yearly increase you can get by delaying Social Security benefits. Additionally, Social Security generally does not have a beneficiary. Benefits cease once you die; however, your heirs or your estate can receive what remains in your retirement accounts.

Social Security may or may not be there when you retire; however, you can control how much you save today.