“More young people believe they’ll see a U.F.O. than that they’ll see their own Social Security Benefits.” – Mitch McConnell
When our company is preparing a financial plan in our San Antonio office, we run on rules of thumb and then customize based on the client’s particular financial situation. The rule of thumb we developed after countless debates is that we should not use Social Security as part of the planning process if someone is under age 55.
Even those who watch more “Survivor” than CNBC knows that Social Security is bankrupt. But people are still paying in and benefits haven’t stopped, so we have to ask ourselves, can we count on it?
It depends on your age and income.
Using the Congressional Budget Office’s 500 distribution of outcomes, you can get some degree of unemotional probabilities. Someone who is 55 or older has a 93 percent probability of successfully receiving most of their Social Security. Yes, I didn’t say all, I said “most.” But “most” is 80 percent or more. The question is, how could the government possibly reduce the benefit promised? They will reduce the promised benefit by (a) increased taxes on the benefits, (b) reduction in inflation or (c) means based testing. Your income could play a key role in the benefit reduction. Currently, 85 percent of your Social Security is subject to income tax depending on your income ($34,000 single and $44,000 married filing joint, 2016). This number will not stay flat over the next 30 years. Appropriate planning can help mitigate the taxes on Social Security.
Considering the probabilities, however, if you are 55 or older, you should plan to receive the benefit.
Alternatively, the younger generation (those born in the 1980s) doesn’t have the same luxury of probabilities. Those in their 30s have a 68 percent chance of getting most of their Social Security and only a 5 percent chance of getting 99 percent or more of the benefit promised. This frightening thought should make any 30-something aggressively start saving … yesterday.
So, our rule of thumb is still reasonable. If you are 55 or older, the probability is likely that you will get “most” of your expected benefit.
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