Why Social Security Alone Won’t Save Your Retirement

Depending only on Social Security for your retirement may not be enough, especially considering the current situation. It is important to plan ahead and consider other factors, such as withdrawing from retirement accounts strategically and exploring annuities.

When preparing for retirement, many people initially focus on Social Security. This is because Social Security benefits provide a guaranteed income for life, adjust for the cost of living, and offer tax advantages. These payments often form the foundation of retirement income, ensuring that basic expenses are covered.

However, recent news about the future of Social Security has raised concerns and made people question their retirement strategies. A recent survey by Allianz Life Insurance Company of North America revealed that 74% of Americans do not believe they can rely solely on Social Security for retirement income.

While Social Security is an important component of a retirement strategy, it should not be the sole focus. Here are some tips to enhance your retirement strategy and gain confidence, regardless of potential changes in Social Security policies:

#1 Plan for Social Security in advance: 

Maximizing your Social Security benefits requires preparation. Several factors impact the amount you receive, including your work history, benefits start date, full retirement age (FRA), taxes, and additional sources of income. For instance, starting Social Security at age 62 results in smaller monthly payments than claiming benefits at or closer to FRA. Planning ahead ensures you have funds to cover essential expenses during any gap between retirement and claiming Social Security.

Related article: Ten Things Every American Should Know About Social Security

#2 Prioritize IRA distributions before Social Security: 

Individual Retirement Accounts (IRAs) play a significant role in many retirement plans, providing a source of income throughout retirement. However, relying solely on an IRA for income later in retirement can lead to substantial tax burdens. IRA distributions are typically taxed at regular income tax rates, which may change over time. To manage this, withdrawing from your IRA earlier to delay Social Security benefits can be advantageous. This strategy increases future Social Security payments while reducing required minimum distributions (RMDs) from the IRA. If leaving an inheritance for beneficiaries is a goal, remember that an IRA may not be the most tax-efficient option.

#3 Optimize your retirement strategy for taxes: 

It is advisable to avoid having an excessive amount of money in a single tax category to prevent overpaying taxes while lacking the desired guaranteed income. Developing a tax-efficient withdrawal plan requires proactive planning and seeking guidance from a financial professional. Some experts suggest that optimizing your retirement strategy can increase your spending capacity during retirement.

Related articles: Are You Falling Into A Hidden Tax Trap By Delaying RMDs?

#4 Explore additional sources of guaranteed income: 

Once you have assessed your potential Social Security payments, consider other sources of guaranteed income, such as a pension or annuity, if available. An annuity is a financial product that offers a steady source of income during retirement. It is a long-term investment that provides a sense of financial stability. Adding an annuity or similar product to your portfolio approximately five to 10 years before retirement can help mitigate concerns about running out of money. Certain annuities offer increasing income options to combat inflation and rising living costs.

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Although the future of Social Security may appear uncertain, taking comprehensive financial steps can help minimize the associated risks. A well-rounded retirement strategy, including a diversified portfolio and additional sources of guaranteed lifetime income, can instill confidence and provide a more secure retirement outlook.