For many Americans, Social Security benefits are no longer a guarantee. Sure, we all still have to pay into the system, but unless that system is seriously reformed, there simply won't be enough money in it to pay us all out. No one really knows when the money will dry up, but the trustees of the Social Security Administration estimate that the Social Security Trust Fund will be completely depleted by the year 2040. So anyone turning 65 after that date (that would make you 29 years old or younger today), can't reasonably expect to receive any SSI benefits, though you will have paid a great deal of your salary into the system to pay out those that retired before you. Yes, it's basically a ponzi-scheme.
But, what does that mean for retirement planning?
The short answer: Young people have to invest much more cautiously than members of the previous generation had to.
Long answer: Traditional investing philosophy goes something like this:
For the long term investor, your portfolio should be well diversified among high-yield/high-risk assets, medium risk/medium yield assets, and low yield/low risk assets. But, since you are automatically investing in low-yield/low risk assets by paying into the Social Security Administration, your actual invest able income (like your IRA and 401k accounts) can be invested almost solely in medium-to-high risk assets like equities and lower-grade bonds.
This rationale explains why some "conservatively" allocated Mutual Funds and ETFs that many people invest their 401ks and IRAs in are actually allocated to 60/70% stocks or higher. This, by itself, would be a rather high risk allocation; but when balanced against the low-risk SSI payments, each investor ends up with a well diversified portfolio (at least as far as risk is concerned).
But now, the younger generation is paying into Social Security with a very high probability that not only will they not see any return from that money, they will lose all the money they've invested. So, unfortunately, Social Security has become the ultimate high risk/low yield asset. Everyone has a small chance of getting a small return, and a large chance of losing everything they invested.
There are 2 different ways for investors to compensate for this:
1. Some employers are now giving their employees the option of waiving Social Security. If you have such an employer, buy them a thank you card, then take all the money you would be paying into Social Security, and put it in low yield/low risk assets like CDs, T-Bills, High-Grade bonds, etc. Then you can invest the rest of your portfolio as you would have if you still had that Social-Security net there to protect you in a fall.
2. If you're stuck paying into the system, it would behoove you to assume that you'll never see any of that money again. (Always plan for the worst-case scenario). You've got to ratchet up the amount of money you're investing from every paycheck to compensate for the lack of SSI in your future. Take the same amount of money that you're paying into Social Security, and invest in in low yield/low risk assets. (This is in addition to the amount you're already investing). The rest of your portfolio can stay the same. The effect: the allocation of your 401k will, on average, look alot more conservative than your elders, but you'll be benefiting from the same type of safety net. (You'll just be weaving the net yourself.) The major difference is that you'll have much less spending money every month, as you'll have taken a higher chunk out of your paycheck to invest. This will suck, (what can I say?), but at least you'll be protecting your future financial well-being.
About the Author
Leslie Lewis Senior Market Analyst Lewis Financial Research http://www.lewisfr.com Our mission: To provide all investors with unbiased, well supported, and thoroughly researched information.
But, what does that mean for retirement planning?
The short answer: Young people have to invest much more cautiously than members of the previous generation had to.
Long answer: Traditional investing philosophy goes something like this:
For the long term investor, your portfolio should be well diversified among high-yield/high-risk assets, medium risk/medium yield assets, and low yield/low risk assets. But, since you are automatically investing in low-yield/low risk assets by paying into the Social Security Administration, your actual invest able income (like your IRA and 401k accounts) can be invested almost solely in medium-to-high risk assets like equities and lower-grade bonds.
This rationale explains why some "conservatively" allocated Mutual Funds and ETFs that many people invest their 401ks and IRAs in are actually allocated to 60/70% stocks or higher. This, by itself, would be a rather high risk allocation; but when balanced against the low-risk SSI payments, each investor ends up with a well diversified portfolio (at least as far as risk is concerned).
But now, the younger generation is paying into Social Security with a very high probability that not only will they not see any return from that money, they will lose all the money they've invested. So, unfortunately, Social Security has become the ultimate high risk/low yield asset. Everyone has a small chance of getting a small return, and a large chance of losing everything they invested.
There are 2 different ways for investors to compensate for this:
1. Some employers are now giving their employees the option of waiving Social Security. If you have such an employer, buy them a thank you card, then take all the money you would be paying into Social Security, and put it in low yield/low risk assets like CDs, T-Bills, High-Grade bonds, etc. Then you can invest the rest of your portfolio as you would have if you still had that Social-Security net there to protect you in a fall.
2. If you're stuck paying into the system, it would behoove you to assume that you'll never see any of that money again. (Always plan for the worst-case scenario). You've got to ratchet up the amount of money you're investing from every paycheck to compensate for the lack of SSI in your future. Take the same amount of money that you're paying into Social Security, and invest in in low yield/low risk assets. (This is in addition to the amount you're already investing). The rest of your portfolio can stay the same. The effect: the allocation of your 401k will, on average, look alot more conservative than your elders, but you'll be benefiting from the same type of safety net. (You'll just be weaving the net yourself.) The major difference is that you'll have much less spending money every month, as you'll have taken a higher chunk out of your paycheck to invest. This will suck, (what can I say?), but at least you'll be protecting your future financial well-being.
About the Author
Leslie Lewis Senior Market Analyst Lewis Financial Research http://www.lewisfr.com Our mission: To provide all investors with unbiased, well supported, and thoroughly researched information.