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Is Social Security Running Out?

Social Security represents an important source of income for millions of Americans who paid into the system during their working years. Despite contributing thousands of dollars to the program on average, many people have concerns about the future of the Social Security Administration. Estimates from the SSA itself suggest the trust funds used for benefits payments could be depleted as early as 2033 unless changes are made to the program’s funding structure.

Key Takeaways

  • Social Security is a program that uses taxes to fund a benefits program for individuals who contributed to the program during their working years.
  • Two trust funds hold the funds raised through these taxes, but they are estimated to be depleted by around 2033.
  • The government has acted decisively in the past to make the necessary changes to keep Social Security afloat.
  • Social Security should be just one part of your overall retirement plan, alongside investments, savings and lifestyle changes.

How Does Social Security Work?

Social Security is a taxpayer-funded program designed to supplement income for retired individuals and certain other groups. A great number of American workers—184 million people, according to the Social Security Administration—pay taxes into the Social Security system which funds benefits for current Social Security recipients. When those workers retire or otherwise qualify for Social Security themselves, they will receive benefits equal to a percentage of the amount they contributed in taxes.

While many people think of Social Security as a benefit entirely for retired individuals, that’s not the only group receiving regular benefits from the SSA. Other recipients of Social Security benefits include:

  • People with qualifying disabilities
  • Spouses and children of workers who died
  • Dependent parents of workers who died
  • Spouses and children of Social Security recipients

Is Social Security Running out of Money?

To understand the current state of Social Security, it’s essential first to comprehend how your Social Security taxes are allocated to current beneficiaries.

The tax money collected for Social Security is distributed into one of two trust funds—the Old-Age and Survivors Insurance (OASI) trust fund and the Disability Insurance (DI) trust fund. The funds are then used to pay benefits to their corresponding recipients, with any leftover money invested by the government.

According to estimates released by the SSA, these trust funds are shrinking and could reasonably be expected to be depleted entirely within approximately 15 years. If these trust funds are depleted, the annual income from taxes would only be sufficient to cover 79 percent of the total benefits needed.

If nothing is done to prevent this from happening, Social Security beneficiaries may see a decrease in the percentage of their contributions returned as benefits drop. Benefits would be lower, but they would not disappear entirely. 

It’s also important to note that the trust funds have come close to depletion in the past, but the government has successfully intervened to prevent it. In 1982, Congress was forced to enact emergency legislation to prevent the collapse of the OASI fund. The crisis was averted, and better funding mechanisms were created for the fund to reduce the likelihood of a future crash.

While it is still unclear if or how the federal government might intervene on Social Security’s behalf, even in the worst-case scenario, recipients would still receive a return of some percentage of their investment into the program.

How to Financially Plan Around Social Security?

Regardless of whether or not the Social Security trust fund remains financially solvent, it’s important to have a healthy investment portfolio to prepare you for retirement. Many financial planners recommend aiming for 80 percent of your pre-retirement income from a combination of investments, savings, and Social Security benefits. For the average earner, Social Security benefits are typically between 40 and 50 percent of pre-retirement income.

Many types of investments can help you navigate your retirement more comfortably.

Set up a retirement fund

A retirement fund is a long-term investment account designed to provide certain tax benefits if the money is left untouched for a specified period. They can be created by people of any age, and are a very common tool for those wishing to invest in their retirement.

Max out 401K employer Contributions

Many companies offer matching funds for employee contributions to a 401K retirement account. These accounts function in a similar way to retirement funds, but employers will match employees’ investments up to a certain amount from each paycheck. These matching funds are paid in addition to your paycheck, and it’s a good idea to invest at least enough to reach your employer’s maximum contribution.

Open an IRA

An individual retirement account, or IRA, is another type of account set up to maximize tax benefits for long-term investments. Taxes aren’t paid on funds invested in an IRA at the time they’re placed in the account, making them an appealing target for investment.

Leverage Health Savings Accounts (HSAs)

Medical expenses can be significant at any age, and as you near retirement age, you might find yourself needing to increase your spending on healthcare. An HSA allows for tax-free contributions and growth while the funds are in your account, and those funds can be spent tax-free if they are used for qualifying healthcare products and services.

Lower Housing and Living Expenses, If Possible

Many people find themselves downsizing from much larger homes as they near retirement age. As children grow up and move out, a smaller, lower-upkeep residence becomes appealing to many people. Reducing your footprint, and thereby your costs, is a great way to supplement your savings and investments as you enter retirement. Lower overhead means the percentage of pre-retirement income necessary to sustain your lifestyle stays low as well.

Bottom Line

While there do appear to be some changes on the horizon for Social Security, there’s no need to panic about an unexpected loss of benefits for future recipients. Even without government action, the program will still be able to operate at around 80 percent capacity. With appropriate government intervention, the program can remain totally solvent and continue supporting retired workers, disabled individuals and many other people and families for years to come.

No matter what happens to the SSA, it’s smart to maintain a balanced set of investments as you plan your retirement. Social Security is a crucial component of the retirement puzzle for many individuals, but it should never be viewed as the sole source of income for retirees. 

Horizons Wealth Management can help you with your financial future, even if Social Security is a bit tumultuous. Schedule a call today and start planning for your retirement.

Social Security FAQ

H3: What happens if Social Security runs out of money?

If the Social Security trust funds run out of money, benefits will likely be reduced to match the level of funds coming into the program from taxes. The SSA estimates it could operate Social Security at around 80 percent capacity if this were to happen.

At what age do you get 100% of your Social Security?

You will receive the full amount of your Social Security benefits if you begin drawing them after you reach the full retirement age. This age has increased slightly over time, but is currently 67 years old.

 Do RMDs Affect Social Security?

Required minimum distributions don’t directly impact your Social Security benefits, but they can affect your tax liability. The amount of taxes you must pay on your benefits is determined by your income bracket, and RMDs are treated as income for tax purposes. If your RMD increases your tax bracket, you might have to pay more taxes on your SSA benefits.

How do I know if I’m ready to retire?

Retirement looks different for everyone, and the age at which you’re able to stop working is largely dependent on your pre-retirement income, your overhead, savings and investments. Many planners recommend creating a strategy to access around 80 percent of your pre-retirement income, but this number can be much lower or higher for certain individuals.

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Senior woman with grandchild
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What are RMD (Required Minimum Distributions) and What You Need to Know

After a certain age, individuals with retirement accounts must withdraw a certain amount from these accounts each year as a minimum. This withdrawal is known as a required minimum distribution, or RMD, and it typically becomes mandatory at age 73.

Key Takeaways

  • Required minimum distributions are the minimum amount you must withdraw from your tax-deductible retirement accounts.
  • These withdrawals are required by law after the age of 73.
  • RMDs can be donated to reduce or eliminate the tax burden created by the additional yearly income.
  • The amount of an RMD is determined by the total value of your qualifying retirement accounts and factors like age, beneficiaries and the original owner of the retirement account.

What Does RMD Stand For and When Does it Start?

Required minimum distributions have been a part of retirement planning in the United States since the mid-1970s with the introduction of IRAs as a new type of long-term investing mechanism. These withdrawals are required by statute for all types of retirement accounts except for Roth IRAs and certain similar types of accounts.

Most people with retirement accounts must start making these withdrawals at age 73, but there are some exceptions to this rule. You aren’t technically required to make your first withdrawal from your retirement accounts until April 1 of the year following your 73rd birthday, for instance. Qualifying charitable contributions from your retirement accounts are also counted toward your RMD, meaning you can offset some or all of your required withdrawal with certain philanthropic contributions.

What If I’m Still Working?

There are also RMD exemptions for individuals who are still working at the company sponsoring their retirement plan, as long as they own less than 5 percent of the company administering the account. This allows people who continue to work past the minimum retirement age to take full advantage of the benefits offered by an IRA or similar account.

What Accounts Require RMDs?

RMDs are required for many types of employer-sponsored retirement plans. The most common types of accounts subject to RMD rules are:

  • Traditional IRAs
  • Rollover IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • 401(k)s
  • 403(b)s

It’s worth noting again that Roth IRAs, Roth 401(k)s and other types of Roth accounts are not subject to the same RMD requirements as these retirement plans.

How to Determine RMD Amount?

How much you’ll need to withdraw from your accounts each year is calculated by dividing each account’s balance as of Dec. 31 by a life expectancy factor calculated using tables provided by the IRS. These life expectancy factors are determined based on a number of factors relating to you, your beneficiaries, and the original owner of the retirement account. 

How to Handle Multiple IRAs

RMDs are calculated for each individual account—if you have more than one IRA, you will need to calculate the RMD for each one based on all the factors considered by the IRS. Once you’ve determined your total RMD for the year, however, you can withdraw that amount from any one IRA or combination of accounts as long as the total withdrawal meets or exceeds your minimum requirement.

How are RMDs Taxed?

Assuming all of your retirement account contributions were tax-deductible, the income gained by withdrawing your RMD will be treated like any other income and taxed accordingly.

In some cases, an individual might make contributions to an IRA or other retirement account that are not tax-deductible but are still subject to an RMD after age 73. In these cases, you will need to work with the IRS or your tax professional to determine how much of your RMD income must be taxed and how much is exempt for the year.

How to Use RMD Assets

Funds withdrawn from your retirement accounts through an RMD can be used in a variety of ways, and some of these uses can help reduce your tax burden or make the assets more useful to your beneficiaries. 

Reinvest the funds

One common use for RMD funds is to reinvest the money elsewhere simply. This can help protect the money from inflation and continue to make it work for you even once it’s no longer in a tax-protected retirement account.

The only caveat to this approach is that the funds cannot be placed back into a typical retirement account—if they are made using RMD funds, the investments must be made into a taxable form of investment account.

Donate to Charities

Charitable donations are another common use of RMDs, and if they’re done correctly, you can avoid paying taxes on some or all of the money withdrawn for the year. Donations made to charitable organizations directly out of your RMD funds are called qualified charitable distributions, or QCDs, and up to $100,000 of these funds each year can be omitted from your taxable income.

Support Education for Your Family

If you have young family members planning to go to college, a 529 education savings plan might be a good use of your RMD funds each year. These savings plans allow your money to continue to grow tax-free and will remain tax-deductible as long as the funds are used for a qualifying educational expense in the future.

Bottom Line

While an RMD can seem confusing at first, especially if you’re recently retired or haven’t had to make withdrawals from your retirement accounts yet, the process is relatively straightforward and doesn’t have to be a financial burden if done correctly. By using your withdrawal wisely through reinvesting and charitable contributions, your RMD can become an opportunity rather than a burden each year. At Horizon Wealth Management, we can help you ensure your financial future is clear with retirement planning services and financial planning services. Schedule a discovery call today!

RMD FAQs

What is the biggest RMD mistake?

Probably the most common mistake people make with their first RMD is failing to withdraw the correct amount or missing the withdrawal deadline. These errors are sometimes accompanied by substantial fines from the IRS, but they can be easily avoided by working with a qualified investment professional to ensure the process is followed correctly and in a timely manner.

Is it better to take RMD monthly or annually?

In the long term, there is little difference if any in an individual’s finances if they choose to withdraw their RMD monthly, quarterly or annually. This decision should be made based on an individual’s needs and personal preferences, and will likely be informed by what other forms of income, if any, the person has.

Do RMDs affect Social Security or Medicare premiums?

RMDs do not directly impact social security payments but can affect Medicare premiums. If your RMDs raise your tax bracket, this can have a secondary effect on the amount of taxes paid on social security income and the Medicare surcharge premiums calculated based on your Modified Adjusted Gross Income.

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Your Brain Does Really Weird Stuff When It Thinks About Money

Money is an emotional topic, but what’s really happening inside our brains when money comes up?  The answer, in short, is a whole lot!   A Harvard Business article explains what your brain looks like while thinking about money. Click below to read the 3 key takeaways.

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How to Keep This Crazy Stock Market From Driving You Nuts

So, how do you stop the market from making you crazy?

The current market is a reminder that days sometimes feel long, while years pass quickly. Don’t confuse that feeling and make long-term moves based on what’s happening on any given day. That’s how years pass and you wind up short of your goals, when the odds were in your favor that staying the course would have paid off.

Read more by clicking here.

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10 Ways To Prevent Money From Ruining Your Marriage

Arguments about money are by far the top predictor of divorce. It’s no secret that fighting about money puts a huge strain on a relationship. Money issues are so troublesome that people who say they’re experiencing stress in their relationship cite “finances” as the number one reason.

This may seem like a grim prognosis for married couples, but it doesn’t have to be.  There are various steps that experts say couples can take to avoid letting money matters get the best of their marriage.

So whether you’re about to say “I do” or money problems have you thinking maybe “I don’t anymore” the following tips can help prevent money from destroying  your relationship.

Click here to read more.

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10 Reasons You’re Not Rich Yet

No matter how much you earn you could be creating your own barriers to financial success without even knowing it. Here are 10 things you might be doing that are preventing you from achieving financial freedom.

Click here to read Money Magazine’s 10 Reasons You’ll Never Be Rich. 

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