Election season is well underway, but no one seems to be talking about Social Security. Experts currently estimate the Social Security Trust Fund will run dry by 2032. That is a real problem for our nation’s workers and retirees.
Our government’s failure to plan is the perfect case study for why retirees must. The cost of poor planning compounds over time. Waiting too long takes options off the table and limits financial flexibility over the long term. That is as true for a household as it is for Social Security.
While the government drags its feet, retirees should build all-weather financial plans that hold up regardless of what comes next.
Social Security has long been a “unicorn” in the world of retirement planning. Social Security benefits have promised a guaranteed, inflation-protected floor of income for life with no market risk. This provides a critical piece of security, especially as humans live longer and the cost of everything rises. It is no coincidence that longevity and inflation are also the two factors driving Social Security to its brink.
If the deal seems too good to be true, that is because it might be. One of the obvious solutions to the problem will be to cut Social Security benefits. This could involve a direct dollar reduction to each individual’s benefit, a delayed starting age for new retirees, or some combination of the two. In any event, the outcome is the same. There could be fewer guaranteed dollars flowing to you in retirement.
The key is to structure a retirement cash flow plan that meets your needs with or without 100% of your expected Social Security benefits. Most retirees fund their lifestyle through some combination of income and investment withdrawals. A reduction in income typically requires a commensurate increase in withdrawals. We often stress test the plan for this exact scenario to determine whether the retiree’s portfolio can weather a Social Security reduction.
In some cases, you may need to adjust your portfolio strategy to accommodate a loss in guaranteed income. Many retirees understand investment risk in the context of their experiences and emotions. However, this framework should also be balanced against the risk each retiree might need to take to meet their spending goals. We often explore how careful adjustments to the investment portfolio can provide more funds for spending needs, travel goals, or potential long-term care costs at the end of life.
Proper financial planning also projects your future tax picture. The government can always raise more revenue from the American taxpayer by increasing payroll and income taxes. We see planning opportunities in an environment where tax rates are historically low and the probability of future tax hikes is high.
Income taxes often occupy the largest share of one’s lifetime wallet. They also increase naturally over time as retirement accounts grow, and annual distributions rise. It can be helpful to project your future taxes through the end of retirement. From there, we then model the impact of potential tax law changes on your overall financial picture.
These model projections also help spotlight opportunities to reduce taxes. For example, retirees with large balances in traditional IRAs and 401(k)s might convert funds to post-tax Roth accounts in early retirement. This takes advantage of a window when your personal income tax rate is often lower. It also shelters a portion of your portfolio from any tax hikes coming down the road.
Tax planning allows individuals to take advantage of today’s tax rates while shielding themselves from future tax hikes. A rare win-win in the world of finance, even if taxes rise or Social Security fails.
Play the hand you’re dealt
Social Security’s day of reckoning does not need to be your own. Build a plan that prepares you for potential scenarios, stress-tests the key risks, and puts the important decisions in your hands. Washington may kick the can down the road, but you should not.
Bryce Schuler is a CERTIFIED FINANCIAL PLANNER™ professional at Tableaux Wealth in Peterborough, providing investment services and flat-fee financial planning. He is also the treasurer of the Francestown Village Water Company and an advocate for financial education throughout the region.