Retirement, Social Security's Depletion And What You Can Do About It Today

With the threat of an unsecure retirement becoming increasingly more eminent as the oldest generation keeps getting older and the average time spent in retirement likewise increasing, many lose sight of the basics.

It is undeniable that retirement security funded solely from the government is likely to disappoint in the decades to come. However, prudent financial strategies can help combat the potential uncomfortable situation.

What Is The Social Security Situation Really?

As explained by Drew Desilver, Pew Research Center senior writer, the complexities of Social Security are innumerable (from a 29-page document in 1935 to the almost 2,600 page current law), but the growing fear is quite possibly more detrimental than the reality.

• The Inter-Generational Transfer: "The taxes paid by today's workers and their employers don't go into dedicated individual accounts […] Nor do Social Security checks represent a return on invested capital […] Rather, the benefits received by today's retirees are funded by the taxes paid by today's workers; when those workers retire, their benefits will be paid for by the next generation of workers' taxes."
• Currently, SS Assets Are Comfortable: "Right now, Social Security has plenty of assets. For much of its history, Social Security was a strictly pay-as-you go system, with current tax receipts funding current benefits. That changed in 1983, when Congress (as part of a comprehensive overhaul of the program) raised the payroll taxes that provide the bulk of Social Security's revenue, to build up a cushion for the coming onslaught of Baby Boomer retirees. For nearly three decades, the system took in far more revenue than it paid out in benefits; the surplus was invested in special non-tradeable Treasury bonds, with interest credited to the system's two trust funds."
• In The Last 5 Years, The Expenses Have Gone Above The Cash Receipts: "Negative cash flow last year was about $74 billion […] and this year the gap is projected to be around $84 billion. While the credited interest on all those Treasuries is still more than enough to cover the shortfall, that will only be true until 2020. After that, Social Security will begin redeeming its hoard of Treasuries for cash to continue paying benefits – as was the plan all along."
• Reserves' Full Depletion By 2013: "The exact depletion dates depend, of course, on future demographic and economic trends. After the reserves are exhausted, the system still will be receiving tax revenue, but it will only be enough to pay about three quarters of scheduled benefits – unless Congress changes the benefit formulas, raises the payroll tax, or makes other changes such as raising the cap on taxable wage income."

Source: Pew Research

So, What Is One To Do?

While it is highly probable that Congress will step in and make the necessary changes to the payroll tax, benefit formulas or other strategies to counter the depletion, there are things each individual can do before retirement to ensure that regardless of the government's involvement, those years after employment are well funded.

1. Take Advantage Of 401(k)s, Roth/Traditional IRAs Or Equivalent Especially if your company has a match policy, don't pass up the opportunity to be saving specifically for retirement. If your employer does not offer a savings account, take matters into your own hands and open an IRA account.2. Do Not Touch Money Set Aside For Retirement While some retirement accounts give you the option to withdraw before retirement, it is best to just leave that account alone. Not only do some retirement accounts have penalties associated with early withdrawal, but getting into the mindset that the account can be touched counteracts the savings potential. Even if you have a retirement account that is not an IRA or 401(k), don't touch funds that are designated for a specific use, regardless of the vehicle.3. Contribute More Than The MinimumIt's a common misconception that contributing the minimum annually to a retirement fund will provide a comfortable retirement. However, this is not the case. Putting in the minimum for any endeavor rarely reaps the largest harvest.4. Constant ContributionsMake contributing to your retirement a habit, not a once-in-a-while ordeal. If you have a tendency to forget (perhaps because you have an IRA vs. 401(k)), consider setting up a direct deposit each month.5. Use Extra Cash As Extra ContributionsWhile there are often max contribution limits to retirement funds, a large portion of the population does not face that particular hurdle. If you wish to contribute more and are not in "danger" of maxing out your annual contribution, consider contributing your tax refund. There are forms from the IRS (specifically, Form 8888) that allow you to directly deposit part or all of your annual tax refund directly into savings/investment accounts.6. If You Do Max Contributions Annually, Consider Taxable Investment AccountsYou shouldn't be deterred from saving as much as you can simply because you have contributed the max to a designated retirement fund.7. DiversifySimilar to number six, cushion your retirement by diversifying your savings. Contribute to a savings account or CD to ensure you do have access to liquid cash, which, if unused, can help bolster your retirement security as well.

Above all, remember that you are in control over your financial future. Do not wait to see if and how the government will provide for you in late-adulthood. Be proactive and embrace the fact that your financial security is ultimately your responsibility. Take control today and reach out to a financial advisor if you need assistance or guidance. Ultimately, it's up to you to take care of yourself.