Social Security has not been adequately funded for years, and there is no plan to fix it. This presents a difficult situation for the next generation of retirees – how can they be prepared financially when they can’t rely on social security?
In the face of mounting evidence that Social Security will not be around for younger generations, it is important to be proactive about saving for retirement. In order to avoid a retirement crisis, people should be building their own personal wealth in an effort to cover expenses in the event that Social Security is no longer around.
A new study by The Senior Citizens League (TSCL) shows that Social Security benefits have lost thirty percent of their value since 2010. Although prices in 2019 are still rising at a rate of 2.5%, the 30% loss of purchasing power from past years means that now current policies expire, present beneficiaries will be in the same position as the Social Security beneficiaries were in 2009, when price inflation was higher at roughly 4%.
There are many ways to build wealth, from investing in stocks and bonds, or by owning a home or small business! Some people, like my father, have successfully maintained financial frugality throughout their entire life. In fact, he still gets a thrill from collecting coupons, earning free PayPal money on rewards sites, and finding out the latest free money hack to increase his bank balance by a few dollars!
But my dad is a man that’s benefited from years of fiscal responsibility. He made wise investment decisions, owned multiple businesses, saved ferociously, and always paid into his pension!
So now his retirement is all golf, day-time coffees with his wife of 36 years (who still works), and not a worry in the world – but what does it mean for the rest of us?
How To Get Financially Prepared For Retirement From The Perspective Of Personal Finance Experts
We reached out and asked some top personal finance experts how they have planned for their retirements. They have shared some genius ways you could also avoid the looming threat of diminishing Social Security, and protect your own financial future.
Lower Your Mortgage Payment
The biggest monthly expense cutting into retirement savings is typically a mortgage payment. Some options to decrease your mortgage and increase your retirement fund are downsizing, renting out part of your home, or refinancing.
Downsizing your home may feel extreme. But, reducing the largest monthly expense first will lead to the biggest increase in your retirement savings. Further, a smaller home provides less room for “stuff”– this could inherently lower your spending on home goods and other things that no longer have a place in a smaller house.
Renting out part of your home is another way to lower your mortgage payment (and allows you to keep your current home). You could turn your unfinished basement into a basement apartment or accessory dwelling unit (ADU). This can be rented out to a long-term tenant or AirBnb guests. Real estate investing on a small scale can provide the extra income needed to boost your retirement savings.
Refinancing is another option worth looking into when interest rates are low. This will allow you to save on the monthly mortgage interest payments. If you bought a home within the past 5 years with less than 20% down, an appraiser can let you know the current property value. If you have 20% equity in the property, the lender can remove your PMI (Private Mortgage Interest). Lowering your interest rate or removing your PMI will leave you with more money to put towards retirement savings every month.
Andy Kolodgie – The House Guys
Invest the Surplus
It doesn’t matter if someone wants to retire at 62, 65 or any age, one of the first steps toward saving for retirement is to increase the household’s monthly surplus of income. Then, use the surplus to pay down debt to reduce high-interest payments, pad an emergency fund to take care of the unexpected, and finally, invest the rest.
The first way to increase the monthly surplus is to cut expenses. Would-be retirees looking to pad their retirement savings need to consider all the things they spend their money on each and every month. Then, make an informed choice as to whether or not they need it.
One of the first places to look is within the bank and credit card statements. Are the banking fees high? What about interest payments? Is there any unknown one-off or recurring expenses that could get reversed? Then, look at all the recurring expenses that can either get reduced or eliminated. For example, think about the cable bill, or the cell phone bills. Are all the extra bells and whistles necessary?
Next, focus on the emergency fund – a kind of “rainy day” account with funds that consumers can rely on in the event of an emergency. With millions of Americans losing their jobs during the pandemic, no doubt, an emergency fund is a great way to both sleep better at night knowing they can weather the storm.
And finally, retirees can take all their newly developed surplus and consider investing it. Certainly, if there’s any concern about social security, replacing that income will be paramount. To mitigate this risk, many investors flock to dividend stocks and real estate to generate tax-efficient, passive, monthly income.
Rick Orford – The Financially Independent Millennial
Build Multiple Passive Income Streams
Even in its heyday, Social Security was only intended as a minor supplement to your other retirement income. It’s up to you to create diverse income streams for yourself in retirement.
I invest in a diversified stock portfolio, and as I get closer to retirement, I’ll shift it more toward higher yield dividend stocks for ongoing dividend income. But I also invest in real estate in many different ways to generate ongoing income. I own rental properties, invest in raw land, lend private notes, and invest through real estate crowdfunding platforms.
You don’t necessarily need a huge stockpile of cash to get started with any of these real estate investments – research creative ways to cover an investment property down payment.
Start building your own diverse passive income streams so that you don’t rely too heavily on any one source, and you’ll enjoy a comfortable, stress-free retirement.
Brian Davis – Spark Rental
Start An Online Business
I think in today’s economic climate it’s a wise decision to not rely on social security income and take control of your own retirement plan.
You should be investing your money in a few very important financial vehicles to set yourself up for success and have enough passive income to allow you to retire.
These investments include investing in low-cost index funds like VTSAX through your 401k and maxing out your Roth IRA, real estate, and potentially starting your own online business.
I personally think starting your own online business is one of the best investments you can ever make. You have far more control over your income, there is more upside, and you can always have an exit plan for immediate cash flow when needed.
These online businesses include blogging, starting an online Newsletter, niche sites, FBA, drop shipping, etc. They are all legitimate types of businesses that you can start and scale over time to set yourself up with many streams of passive income to achieve financial independence and ultimately be able to retire stress-free.
Kelan Kline – The Savvy Couple
Side Hustle With Your Talent
Retirement age can be a scary thing to be approaching for a lot of people in the US as Social Security is rapidly running out of money. If you find yourself close to retirement and not sure if you are quite there yet you should consider using your current talents to start a side hustle.
There are a ton of things you can do with your current talents that will allow you to retire now while making you a little money on the side. What’s even better is you won’t have to learn any new skills because you already have them.
Whatever you did in your previous working life is more than likely still needed today, and will be down the road for that matter, so you can start finding work online rather quickly using any number of websites or apps geared to match up freelancers with companies that need their skills.
You can work as little or as much as you want. You can also work from home most likely and charge whatever rates you want doing something you already are an expert at. What more could you ask for if you need to make a little extra money on the side while enjoying your retirement.
Ben Walker – Transcription Outsourcing
Build Your Own Passive Income Stream
Let’s face it, you can’t rely on the government to take care of you when you are retired. You have to take control of your life and look after yourself. The easiest way to do that is to build a passive income stream through the equity market.
For most investors, investing in passive low-cost index funds like VTI or VXUS is the easiest approach. You want to own a few low-cost index funds that track the broad equity market and bonds. You’d rebalance regularly to your set equity-to-bond percentages. For those that do not want to re-balance regularly, one of the all-in-one ETFs is another excellent way to build up your investment portfolio and your passive income stream.
Some investors that want to be more hands-on may want to look at investing in individual stocks, more specifically, stocks that pay regular dividends. By building up a sizable dividend portfolio, you can live off dividends and potentially not touch your principal at all. Advanced investors can look at selling covered calls, and cash-secured put options for additional income.
In the US, many solid dividend stocks have been raising dividends consistently for over 10 years. Diversification internationally is important when it comes to picking individual stocks. Therefore, one might want to invest internationally and look at some of the best Canadian dividend stocks just north of the border.
If you decide to invest in individual dividend-paying stocks, I believe you should still hold around 30 to 40% of your overall portfolio in index funds. This will allow you to be both sector and geographically diversified.
Bob Lai – Tawcan
Start Saving Now
When it comes to saving for your future, time is your best friend.
So the sooner you start saving, the less you have to save thanks to compound interest and the more your savings will grow.
This is a basic personal finance formula that many people don’t understand.
Take Bob and Joe.
They are both 40 years old and want to retire at 65.
Bob starts investing $300 a month for 25 years and earns 8% annually.
When he hits retirement at age 65, his investment is worth close to $285,000.
Joe waits to start saving until he is 50. He also invests $300 a month and earns the same 8% annually.
At age 65, his investment is worth roughly $105,000.
Waiting 10 years cost Joe $180,000!
In order for Joe to have the same ending balance as Bob, he would need to invest a little more than $800 a month over 15 years.
As you can see, the sooner you start investing, the better you will be.
So do what you have to do to find the money to invest.
Cut and lower your expenses, earn a higher salary from your career, or start a side hustle doing something you love.
While you don’t have to do all of these things, you need to do something so you can have money for retirement.
Jon Dulin – Side Hustling Money
Commit To A Budget
I invest like there will be no Social Security and dream like there is. But in order to invest like there isn’t you have to prioritize it. And, that means putting it into a budget that you will actually stick to. The best budgeting method is the one you’ll use most consistently. I recommend a zero budget centered around your core values.
Even if you can’t save as much as you need to right now, keeping a budget will help you track your spending and earning. The longer you keep track the more places you’ll find to cut in your spending so you can put more towards retirement.
Whatever method you use there are several psychological tricks you can use to stick to your budget including not shopping without a list, avoiding sales unless it’s already something you need, and giving yourself 30 days before making a big purchase.
Jen Smith – Frugal Friends Podcast
Just Say “No” to Lifestyle Inflation
Lifestyle inflation is one of the most common traps that people fall into as they become more financially successful. As they begin to earn more, their spending increases as well, in order to fund a more affluent lifestyle. As a society, it sometimes seems that we take lifestyle inflation for granted, but why should we? You don’t need to move to a larger house or buy a fancy new car even when you’re earning more money.
Instead, what if those mortgage or car payments could go straight into a tax-advantaged retirement savings account or be put towards other long-term investments? Your retirement forecast would look much healthier, and you’d have the peace of mind of knowing that you’re using your increased income responsibly.
Unfortunately, there’s no guarantee that your income will continue to steadily rise throughout your working life – unforeseen changes in personal circumstances, economic downturns, business cutbacks, and many other factors could affect your prospective earnings.
It’s not all doom and gloom, though. If you’ve worked hard and are doing well, you should still be able to enjoy a good quality of life and periodically reward yourself while still building up your retirement savings. As with most things, moderation is the key to ensuring that you have what you need to live comfortably and can cover expensive necessities such as your children’s college tuition or the down payment on a house, while resisting the urge to adopt a lifestyle that will stretch your means.
Matt Taylor – Bold.org
Move To A Smaller House And Invest The Difference
If your children have grown up and are no longer at home, there is not much space needed. Therefore, a good option to save for retirement is to sell your home, buy a smaller one for a lower price, and invest the difference in assets or funds that have a good return and can generate money month after month with the ‘magic of compound interest.‘
Compound interest is nothing more than the interest generated on the interest that you obtain. Thus, the more money you have invested, the more profits will be generated annually, so you will obtain the benefit progressively.
Unlike simple interest, in compound interest the interest is compounded, accumulating to the initial capital, generating more interest and causing a snowball effect. By the end of each year the interests are not withdrawn but are reinvested, obtaining a new initial capital every year, which is higher than the previous one.
The snowball effect occurs in the long term. So, it is important to invest as soon as possible, taking into account interest rates and choosing a sensible investment.
Jacob Wolinsky – Value Walk
Leverage Automation to Build Tax Advantaged Retirement Investments
One of the best ways to save for your future is to hide money from yourself using automation. I’m much less likely to spend money if it doesn’t ever hit my bank account. Therefore, I use the power of automation, specifically, automatic withdrawals, to fund tax-advantaged retirement accounts.
Examples of tax-advantaged retirement accounts include a 401k or Individual Retirement Account (IRA). You can also use a Health Savings Account (HSA) as a retirement vehicle. Tax-advantaged retirement accounts allow you to save on taxes upfront or on the back-end as your money grows. If Social Security doesn’t exist at some point in the future, funding these accounts will be critical to ensure you can retire comfortably.
Like many things in personal finance, the concepts around this topic are relatively simple but the doing can be really hard. The most difficult part can be finding the money to fund tax-advantaged retirement accounts.
The best thing you can do is just get started. Even if that means investing $5 a month. If you have a 401k through an employer, reach out to your human resources department to set up automatic withdrawals from your paycheck.
You can also consider setting up automatic withdrawals from your bank account to a low fee brokerage account such as Vanguard or Fidelity. If your income grows in future years, continue to increase the amount of money you’re putting into these accounts. Small steps taken today can add up big in the future. If you follow this roadmap you will improve your future financial situation.
Mark Patrick – Financial Pilgrimage
Save Your Raise!
You know you need to increase your savings rate, but you continually struggle to find ways to stop living paycheck to paycheck. There’s an answer, and it’s easier than you think.
The strategy, as outlined in the 5 Top Secrets to Retire Early, is to take advantage of any raise you get to increase your savings rate. The next time you get a raise, simply increase your automatic savings (e.g,. 401(k) contribution) by the amount of your pay raise. Let’s say you make $40k a year and you’re getting a 3% pay increase ($1,200/year, or $100/month).
The month before your raise hits your paycheck, increase your 401(k) contribution by $100/month. Your savings will increase every year, and you won’t feel like you’re sacrificing. If you’d prefer to see a bit more money in your paycheck, simply increase your savings by ⅔ of the pay increase ($65/month in this example). You’ll save more, and your paycheck will still increase. Keep doing it year after year, and you won’t have to depend on that Social Security check to buy your groceries in retirement.
Fritz Gilbert – The Retirement Manifesto
Work With a Financial Planner Who Has Your Back
Retirement is, for the majority of our working years, a nebulous thing. How much money will you need? What will your tax situation be like? What kind of lifestyle do you expect to live? Do you have your bases covered if you end up requiring long term care or other costly medical attention? How does inflation affect the bottom line?
A variety of calculations are required to get a realistic estimate of how much money you’ll need (after tax and inflation) to support your retirement lifestyle while also hedging against unforeseen circumstances and even taking into account your estate planning needs and legacy goals. And if you want to get these calculations right, best to bring in the big guns and work with a financial planner.
Ideally your relationship with your financial planner will be long-term and enjoyable. Before they start talking about rates of return and investment choices, they should ask you about your current lifestyle, finances, values, and what you want to do with your life. Money in and of itself is useless unless you know how it will help you meet your goals and live your life by design rather than circumstance. And a financial planner can help you zone in on those goals and create a plan to get you there.
Nora Dunn – The Professional Hobo
Invest In Market Correlated Dollars And Non-market Correlated Dollars
The best way to ensure that you have a safe retirement is to have options. You want market correlated dollars in retirement and you want safe non-market correlated dollars. Some great examples of market investments, especially if you’re young, are Roth IRA’s and Roth 401Ks.
These are tax-deferred investment vehicles geared for retirees. The reason they’re so valuable is that you are taxed on the ‘seed’ and not the harvest. This means that you are only taxed on the amount you put in, and not the amount you get out, which is typically much, much larger (think 40 years of investment returns).
Sometimes, the market is down and you don’t want to make a poor decision by selling at a loss. This is where safe non-market correlated assets come into play. One of the best ones I know of, is permanent life insurance. There are lots of different variables to this vehicle. A lot of people think of life insurance as something that only older people need or something that only provides your family with resources after you pass, but it’s actually a great and safe investment vehicle.
This is because the IRS doesn’t view it as a traditional investment, so it isn’t taxed the same way. For example, the death benefit is tax-free which could in turn mean millions of dollars that goes untaxed to your family. With permanent life insurance (PLI), there is also a living benefit in the form of an accumulated value account. As you pay premiums, it goes into an account that is invested with companies of your choice with the insurance company’s general portfolio.
These investments pay you a dividend which compounds your account’s growth. This is money that isn’t tied to the market so when it tanks, your money is safe and you still have money in your retirement fund that you can live off of.
Combining both of these is the key to a fruitful retirement.
Brandon Brown – Grin
Learn About Real Estate Investment
Your current age is the first consideration for making sure you have enough for retirement if there’s no social security. Obviously, the younger you are, the more time you have to prepare– thus putting you in a better position. Also, the more “irons in the fire” (as my father would say) the better your chances. Or like Robert G. Allen says, you need, “Multiple Streams of Income.” You can reduce expenses. Yeah, that $5 cup of coffee, but that’s not going to cut it.
You need heaps of money if there is no social security. One of the most powerful streams of income is real estate. Rental properties are a great source of income. You just need to handle it like the business it is! BiggerPockets.com and Phil Pustejovsky’s YouTube Channel are the best places to start. I would say that Phil has the BEST videos on this topic. You can do this–it’s just a lot of work to set up. And once you’re ready to find tenants, a22a.com can help you set up your own website so you can do much of the initial screenings yourself.
Scott Bilker – Debt Smart
Recalculate Your Retirement Numbers
While most people count on Social Security, its fate doesn’t have to be as scary as you think. Think of Social Security just like any of your other investments. If one investment doesn’t perform, will your retirement ship sink?
If so, it’s time to recalculate your retirement numbers. In retirement, your goal is to build streams of income such that the failure of any one stream doesn’t derail your financial stability. Given uncertainties around Social Security, calculate how much you’d need to retire if Social Security were to cease to exist.
“Instead of Social Security being the “base case,” think of it as additional gravy to your retirement income should it exist,” says Connor Brown, a personal finance expert from After School Finance.
While there’s no perfect formula, the 4% rule is perhaps the most well-known calculation. This approach states you can safely withdraw 4% of your investment portfolio balance per year and not have to worry about running out of money. With the 4% rule, you’re likely to remain in good shape financially, even if Social Security goes away.
Again, rather than viewing the future of Social Security as doom and gloom, instead recalibrate your expectations to treat it just like any other investment – if it does well, that’s great, but if it doesn’t, you’ll already have a plan in place for financial success.
Connor Brown – After School Finance
New study reveals 4 costly social security mistakes
Error 1: Collecting spousal benefits as a divorcee
Error 2: Collecting survivor benefits as a divorcee
Error 3: Claiming survivor benefits
Error 4: Maximizing monthly Social Security payments
Education on Social Security is severely lacking
Downsize and Simplify Your Life
You may need to make changes, such as downsizing your home or apartment, eliminating nonessentials like cable television, avoiding getting the latest iPhone, or a gym membership, or driving a less expensive automobile.
Downsizing to a smaller home is not enough for many elderly people. They must sell their houses and move in with their grown children.
The sale of a property, assuming no new home to purchase, may be enough to provide a decent retirement.
Brian Meiggs – Smarts
Set Specific Goals
When it comes to retirement savings, most people save without specific goals. To have a comfortable retirement with or without monthly social security checks, goal setting is necessary. Goals help by clarifying exactly what is needed in order to achieve success. They’re also effective for increasing and maintaining focus and motivation over a long period of time, which is essential for retirement savings.
An overall net worth or investment portfolio goal should be set to determine how much money is needed for a comfortable retirement. There are plenty of online retirement calculators that can help with determining this goal.
Those who want to live off dividends can calculate how much of a portfolio they need to generate a specific income. For example, someone with a goal of $50,000 of income in retirement would need to build a portfolio of $1,250,000 that generates an annual dividend yield of 4%. In this case, there’s nothing left to guesswork or chance.
Of course, it’s equally important to set a deadline for achieving the goal. For example, the goal might be to have an investment portfolio worth $2 million dollars by the age of 65 years old. With a specific goal, it’s possible to measure progress at any time, or set a yearly or monthly savings amount that makes it possible to achieve the goal, essentially forming a blueprint for retirement savings.
Marc Andre – Vital Dollar
Cash In On Investment Incentives
There’s no way of avoiding the fact that investing in stocks, shares and cryptocurrency can be risky. The value of your portfolios can go down as well as up. However, the potential opportunities for increasing funds for retirement can be a huge calling for many and this is why looking for platform incentives and offers for free stocks and shares can really help to boost your investment portfolio and increase your margins for profit.
There is a large array of trading platforms offering free stocks, shares and crypto out there. Many you will need to sign up to and fund with a small amount in order to unlock the free holdings, but if done methodically you can access thousands of dollars worth for your portfolio.
The vast majority of these stocks, shares and cryptocurrency offers are randomly allocated, so there’s often no control over which investment opportunity you’ll receive. This is not a problem though as most can be quickly traded for preferred stocks or bigger more established cryptocurrencies like Ethereum, Bitcoin or Cardano.
Savvy investors can cash in on these sign up bonuses and incentives, choosing preferred stocks, shares and crypto to “go long” on and leaving their portfolios alone, ready for their retirement. Popular areas for future strong markets include the EV industry, space industry and even the managed, niche-specific ETFs which manage themselves more autonomously for your future return potential. The long term crypto market based on historical returns is also bullish in nature.
Olly Cator – Savvy Dad
Invest In High Quality Dividend Growth Stocks
Retirement investing is about one thing above all others; income.
You must replace at least a portion of the income you received from your work with passive income from your investments. A fully funded retirement means having your passive income exceed your expenses.
And that’s where high quality dividend growth stocks come in. They match what retirement investors need. Namely, an investment that offers current income (dividend yield), income growth (the ‘growth’ in dividend growth) and safety (the ‘high quality’ aspect).
There’s a select group of high quality dividend growth stocks called the Dividend Aristocrats that are a ‘shortcut’ to finding these types of investments…
To be a Dividend Aristocrat, a security must be in the S&P 500, have 25+ years of consecutive dividend increases, and meet certain size and liquidity requirements.
It’s the long dividend history that makes Dividend Aristocrats an interesting investment – especially if there’s no social security. That’s because a long dividend history shows that a company is historically both willing and able to increase its dividend year after year. This in turn means rising dividend income for investors to offset inflation and potentially provide higher income further into retirement.
Ben Reynolds – Sure Dividend
Begin With The End In Mind
A good retirement strategy starts with the end goal in mind. First, you need to estimate the amount of money you would need to save to retire.
The 4% rule (based on a series of papers known as the Trinity Study) is a popular method to determine your retirement amount. According to the 4% rule, you would need approximately 25-30x of your expected annual expenses to retire.
Creating a budget will help you determine how much money you currently spend each year and project your future annual expenses. It will also help you set an annual savings goal, which you can further break down into monthly or weekly amounts.
Second, once you know your estimated annual expenses and have set your savings target, you are ready for the next step of your retirement strategy. You will now need to maximize your income, expenses, and savings as follows:
1. Increase and diversify your income sources. Look for income-boosting opportunities such as learning new skills to fetch a higher pay, starting a side hustle, or negotiating a raise with your employer.
2. Consider ways to cut back on expenses without compromising your desired lifestyle. For example, you can minimize flight and hotel costs through travel hacking if you love to travel.
3. Optimize your savings and investing rate through automation. Automatic savings will help you avoid the temptation to make unnecessary purchases and increase the chances of achieving your goals.
Nikki Kirimi – Money World Basics
Our 21 experts have spoken, and the truth is we must take our financial futures into our own hands. Any sort of blind reliance on Social Security may well be the unraveling of one’s dream retirement.
There is a myriad of strategies, side hustles, and financial wizardry that can be undertaken in order to avoid the pitfalls of Government support and societal financial safety nets. Social Security may well be nearing retirement, but it doesn’t mean our own should be in any sort of jeopardy.
How to gain financial common sense
1. Determine your optimal asset allocation
2. Take risks while you’re young
3. Regularly rebalance
4. Take advantage of your employer match
5. Track your progress
6. Remind yourself that your sacrifice is worthwhile
7. Don’t borrow against your account
8. Don’t cash out your 401(k) when you change jobs
9. Take care of the legal documents
10. Let the professionals handle it
Video: How Social Security benefits are calculated if you make $35,000 per year (CNBC)