Considering the recent tweaks to Social Security, it might be worth considering your 401(k) as the foundation of your retirement planning.
Last year, it was announced that the “file and suspend” loophole in Social Security would be closing on April 30. Once both members of a couple reached retirement age, that loophole made it possible for the higher earner to file for benefits and suspend them until age 70 while the lower earner could file for the other's spousal benefit -- which is up to 50% of the highest earner's Social Security benefits. Within the couple, each member's own benefits would go untouched and continue to grow until age 70, when the lower earner could stop taking the spousal benefit and go for the higher benefit if necessary.
That's now as good as gone, as is the “restricted application” loophole that allowed someone who was full retirement age or older and eligible for either a retirement benefit on his own record or a spousal benefit to restrict the scope of his application to only receive the spousal benefits he's entitled to, allowing him to continue earning delayed credits on his own record until he files at age 70. That allowed many couples to delay filing to the maximum age 70 benefit while allowing one of them to receive four years of spousal benefits from age 66 to 70.
Gail Buckner, vice president and national planning spokesperson at Franklin Templeton Investments, notes that this decision also affects divorced spouses, who were able to file and restrict their own benefits and receive a 50% spousal benefits if they were married to their ex for ten years or more. Under the old rule, if a person filed and restricted his benefits at age 66, he would see see benefits increase at least 32% to the maximum awarded at age 70. Now, that all-important bridge to 70 is washed away.
“Due to the law change, those who do not meet the age requirement and want to retire at the federal retirement age have to decide whether to take: 100% of the benefit they earned based upon their own work history, or 50% of what their ex would get at the federal retirement age,” she says. “If they want or need more income than this, their only option is to delay starting Social Security and keep working.”
According to a Franklin Templeton study conducted last year, 55% of Americans were already considering working during their retirement before the Social Security loopholes closed. That included 30% of those ages 18 to 24 who never plan to retire. In that same survey, respondents were uncertain about the amount of their current income Social Security will replace (39% don't know), when to start taking the benefit (22% didn't know) and whether it will provide expected income in retirement (37%).
As a result, the loss of benefit loopholes leaves a vacuum that can only be filled for some couples by extra retirement savings.
Unfortunately, a survey by Capital One Investing found that 47.9% of all respondents reported that they do not plan on increasing contributions to their 401(k) retirement plans in 2016. Even worse, 44% of respondents aged 18 to 24 reported that they do not plan on increasing contributions to their 401(k) retirement plans in this year, with 35.2% reporting that they do not have an employer-sponsored retirement plan. This is not great news, especially for those closing in on retirement age
“People close to retirement should consider the option of maxing out their 401(k) contributions/employer match if they have one as setting aside the full amount offered through one’s plan may be a great strategy for their long-term investments,” says Stuart Robertson, president of Sharebuilder 401(k). “Another option to consider, if maxing out your contributions isn’t possible, is to funnel a portion of each bonus, raise, etc. towards your 401(k) or IRA to steadily increase your contributions.”
Robertson notes that if you have a 401(k) and are 50 or older, the IRS allows you to make catch-up contributions of $6,000 for a total $24,000 in annual personal tax-deferred contributions. Workers that age can also make catch-up contributions of $1,000 in your IRA for a total of $6,500 in tax-deferred contributions.
James Nichols, head of customer solutions group at Voya Financial, says that's key, as he believes people should be saving at least 70% of their annual income in order to have a secure retirement and to maintain the lifestyle they were living before leaving work. Some people will need more than that and some will need less depending of their lifestyle desires, health expenses, retirement plans and other factors, but with 59% of working Americans telling Voya they are concerned about outliving their savings and 74% never having calculated their monthly retirement income needs, it's time to start accounting for money that Social Security just won't offer anymore.
“To adjust for inflation, make sure your money is still working for you in retirement,” Nichols says. “You may have 30 years or more of retirement, so your money needs to continue to grow during that time. Make sure your portfolio is not too conservative and that you diversify your investments.”
And if at all possible, take an employer's offer to match contributions. According to a survey conducted last year by The Principal, 83% of Millennials take full advantage of matching contributions when offered through their employer-sponsored retirement plan. Even then, however, it sometimes isn't enough.
“The employer match is a valuable and important incentive to get Millennials saving, but the amount of the match is not a signal to stop saving,” says Jerry Patterson, Senior Vice President of Retirement and Investor Services at The Principal. “Most matching formulas phase out once an employee reaches a savings level of 3% or 4% of pay — well short of the 10% experts indicate they should be saving.”
In fairness to U.S. workers, very few of them are betting heavily on Social Security to begin with. According to Bankrate, just 13% expect it to account for all or most of their retirement income. Another 14% expect it to account for half their retirement income. About 25% believe they won’t get anything. That's one in four firmly believing its just won't exist by the time they get to their retirement.
Meanwhile, an RBC survey conducted in October, found that 72% of Americans think they will need to rely on Social Security in their retirement, but only 55% think those benefits will be available when they need them. However, 63% of Millennials think Social Security will fund at least some of their retirement several decades from now, and they aren't wrong. Even though the trustees in charge of Social Security say the program will cost more than the tax revenue paying for it by 2019 and will run out of reserves in 2033, Social Security will be able to keep paying 77% of all benefits due after that time and 72% of those benefits after 2088, assuming that absolutely nothing will be done to bolster Social Security until that time.
Closing the filing loopholes was actually a step toward keeping Social Security solvent, as was shifting retirement age from 65 to 67 for those born after 1959. Still, the percentage of your retirement that Social Security will cover may not be as robust in future generations. This is why Melinda Kibler, a certified financial planner with Palisades Hudson Financial Group’s Fort Lauderdale, Fla. office, suggests that once workers have maxed out their 401(k) contributions, they consider opening up a traditional or Roth IRA if they have additional cash available. Also, if your employer doesn’t offer a retirement plan, it’s even more important to save in a traditional or Roth IRA, or a SEP-IRA if you’re self-employed.
“Since neither employers nor Social Security will fully fund a decent retirement,” Kibler says, “you have to take the initiative.”
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.