Social Security is one of the most popular entitlement
programs in the United States and the likelihood that this benefit may be
reduced or end completely is still a common Social Security myth. What is
universally recognized, however, is that Social Security is not designed to act
as the sole source of income for anyone entering retirement.
Gen Z might have decades ahead of them before they hit their
retirement years, but they can start planning ahead now for alternative means
of income so they can retire with Social Security as an added bonus.
Open an Individual Retirement Account (IRA)
Gen Zers may choose to open either a traditional IRA or a
Roth IRA.
A traditional IRA is tax-deferred, meaning you may be
eligible for a tax deduction each year you contribute to the account. These
earnings grow tax deferred, but are subject to ordinary income taxes if and
when you decide to withdraw any money before age 59 ½.
A Roth IRA sets a maximum on contribution limits each year.
(In 2022, the maximum contribution for those under age 50 is $6,000.) If you
have held a Roth IRA account for five years, you may withdraw earnings income
tax-free at age 59½. Those that withdraw earnings earlier are subject to a 10%
penalty.
“If you’ve had these accounts set up for some time and made
contributions regularly, then the potential growth of these accounts could make
up for Social Security reductions,” said Dustin C. Newton, CFP and financial
advisor at Ascent Financial Group.
Defined Contribution Plans
If you work for a company that has a defined contribution
plan, like a 401(k), 403(b) or a 457 plan, Newton recommends making
contributions. Make sure to get the max matching contribution if your employer
offers it, too. Over time, Newton said the accumulated income in these accounts
can help supplement Social Security.
Defined Pension Plans
Depending on where a Gen Zer works and if that organization
offers pension benefits, they may be able to use a pension to supplement their
retirement.
While these plans are not as common as they used to be, you
can check in with your employer to see if they offer pension benefits and learn
more about how eligibility, including the number of years you may need to work
for the organization, is determined for these benefits.
Continue Putting Money Into Personal Savings
If you have always been mindful to tuck a percentage of your
paycheck into savings, keep up with that healthy financial habit. The amount
you have in personal savings may be used to make up the difference in Social
Security benefits later in life.
“Funds tucked away in a savings account may be used to
purchase more long-term options, such as an annuity,” said Newton.
Every Gen Zer is different and what works best for each
individual will depend on their situation. If you think your savings will
become your primary source of Social Security supplementation, Newton
recommends consider consulting a financial advisor who can help you determine a
long-term, more sustainable solution.
Delay Retirement
For some retirees and pre-retirees, if Social Security
doesn’t help make ends meet and there are not enough or no benefits in an
individual retirement account, employer contribution plan, pension plan or
savings, you may need to consider delaying retirement.
While delaying retirement may sound like it takes you a step
backward, it can actually be a powerful way for Gen Zers to continue saving
more money. The latest you can delay claiming Social Security is at age 70. If
you delay Social Security, your annual income may increase up to 8% for the
rest of your life through compounded interest. If you are age 62 and postpone
Social Security until you are 70, this can result in a 77% increase in annual
income for the rest of your life.
In addition to receiving the maximum payment available,
those that delay retirement until age 70 will also be covered under health
insurance. Most Americans need to work to at least age 65 when they qualify for
Medicare.
The Value of Multiple Income Streams in Retirement
Those that plan on Social Security as their primary source
of income in retirement may find it challenging to deal with the reduction in
benefits. The best way for Gen Zers to manage this, as they look toward the
future of their retirement years, is to create multiple streams of income.
“The key is to never rely on just one source to provide your
future retirement income needs,” said Newton. Diversifying your future
retirement income streams ensures that you are not relying solely on Social
Security in your retirement years.
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