Excerpt Adapted From: The Financial Shepherd-
Why Dollars + Change = Sense by Glen Wright and Sy Pugh
For much of the 20th century, retirement in America was traditionally defined in terms of its relationship to participation in the active workforce. An individual would work full-time until a certain age, and then leave employment to spend a few years quietly rocking on the front porch. Declining health often made retirement short and unpleasant. Retirement planning, as such, typically focused on saving enough to guarantee minimal survival for a relatively brief period of time.
More recently, however, many individuals are beginning to recognize that for a number of reasons, this traditional view of retirement is no longer accurate. Some individuals, for example, are voluntarily choosing to retire early, in their 40s or 50s. Others, because they enjoy working, choose to remain employed well past the traditional retirement age of 65. And many retirees do more than just rock on the front porch. Retirement is now often defined by activities such as travel, returning to school, volunteer work, or the pursuit of favorite hobbies or sports.
However, this changed face of retirement—with all of its possibilities—does not happen automatically. Many of the issues associated with retirement, such as ill health, and the need to provide income, still exist. With proper planning, these needs can adequately be addressed. So, ask yourself, ‘What exactly do I need and how much money will it take to comfortably retire?’
Retirement in the new millennium now encompasses many more complex issues than it did decades ago. When most of us were growing up, the terms Social Security and retirement were practically synonymous. The process was fairly straightforward: graduate from high school, maybe go to college, then get a job and stay there for 30 years while paying into the Social Security system; then retire, relax on a front porch swing, and collect a monthly payout in return for your years of dedicated service. Well, that is no longer the case, and complete reliance on an under-funded Social Security system that’s heading toward bankruptcy is certainly a risky proposition. Here’s why:
Social Security is a system of social insurance benefits available to all covered workers in the United States providing added protections against the societal pressures of advanced age, disability, and poverty. The program was initially launched in the mid- 1930s as part of President Franklin D. Roosevelt’s New Deal package. The benefits are funded primarily by payroll taxes paid by covered employees, employers, and self-employed individuals, and they kick in at age 65 (or reduced benefits at age 62). The goal of Social Security has always been to provide a secure future for American workers. Ironically, that sense of “security” is slowly eroding because of an imbalance of more retired workers from the Baby Boomer generation receiving benefits from the system versus the number of current workers paying into the system. Additionally, economic downturn, decreased interest rate earnings, and escalating inflation rates have weakened the value of the dollar over time. It is quite possible that Social Security as we’ve known it for decades might no longer be in existence in the not-too-distant future. Successful financial planning for retirement will require an investment strategy much more comprehensive than Social Security – but at least it’s a start.
To qualify for Social Security benefits, a worker must be either “fully” insured or “currently” insured. Eligibility for “insured” status is earned by acquiring credits based on wages or self-employment income during a year. In 2010, an individual had to earn $1,120 in covered earnings to receive one credit and $4,480 to earn the maximum of four credits for the year. Americans workers become fully insured by earning 40 credits or by working 10 years in covered employment. The following benefits are available for fully insured workers:
- Worker’s benefit – Monthly income for a retired or disabled worker.
- Spouse’s benefit – Monthly income for the spouse or former spouse of a retired or disabled worker.
- Widow(er)’s benefit – Monthly retirement income for the surviving spouse or former spouse of a deceased worker.
- Child’s benefit – Monthly income for the dependent child of a deceased, disabled, or retired worker. The child must be under age 18; or 18 or 19 and a full-time elementary or high school student; or over 18 and disabled before age 22.
- Mother’s or Father’s benefit – Monthly income paid to a surviving spouse who is caring for a worker’s dependent child who is under age 16 or over age 16, but disabled before age 22. If under age 62, the spouse of a retired worker receives the same benefits.
- Parent’s benefit – Monthly income paid to the surviving dependent parent or dependent parents of a deceased worker.
Still, no matter how you look at it, the derived benefits from the Social Security system do not meet the ever-increasing costs of living and rising levels of inflation. Government-subsidized benefits alone are simply not going to be enough.