Experts: 5 Things Millennials Should Know About Social Security
Many millennials, born between 1981 to 1996, are approaching or are already in their 40s. This means millennials are old enough to start thinking about Social Security and the key role it plays in retirement. Here’s what millennials need to know about Social Security as a retirement benefit right now, plus GOBankingRates takes a deep dive into the biggest myth surrounding the future of Social Security.
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Social Security Includes Disability Benefits
Most people commonly associate Social Security with retirement benefits. The reality is that the Social Security system extends much further than retirement alone
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Kristen Perez, CFP and financial planner at EP Wealth Advisors, said Social Security includes benefits for the worker and their family for disability and death.
“Should a worker become disabled and unable to work for longer than a year, they may qualify for benefits, and so might their children, so long as the worker had earned 40 credits, or the equivalent of paying Social Security taxes for 10 years. Should a worker die, their children and spouse may qualify for benefits,” Perez said.
Divorced Individuals Might Be Able To Collect Social Security
Many people do not understand the specifics of Social Security and divorce. Paul LaPiana, CFP and head of product with MassMutual, said a divorced person might be able to collect Social Security retirement benefits based on an ex-spouse’s earnings history.
What is key in knowing about this, however, is timing. LaPiana said to qualify the marriage must last for 10 years or more. Spousal benefits and survivor benefits can be thousands of tax-advantaged dollars for those who qualify.
Additionally, LaPiana said the payment of these benefits to a divorced spouse in no way reduces the Social Security benefits to the other spouse. If you are contemplating a divorce and are close to the 10-year mark in your marriage, LaPiana said it might pay to wait as the financial difference in your retirement years could be significant.
Being Out of the Workforce Impacts Social Security
If you have been out of the workforce for a few years or even longer than that, now is the time to think about reentering the workforce.
“Social Security retirement benefits are based on a general average of 35 years of your highest but not consecutive years of earning,” LaPiana said. “When you have zeroes in that mix the average will decline.”
Any year where there is a zero year may mean your Social Security retirement benefits will be dramatically less for the full span of your retirement years. Fortunately, reentering the workforce may remedy this issue.
“Each year you work replaces a zero year. When that happens, your retirement benefits can go up,” LaPiana said.
You Still Need To Save for Retirement
Social Security alone is not likely, for most millennials, to be the sole benefit relied on during retirement. Millennials will probably need to cover some financial gaps when they retire, which is why saving for retirement now is so important.
Perez recommends using your employer retirement plan if you have one available. Contribute enough to get the full match. If you don’t have an employer retirement plan, open a Roth IRA and max out contributions. Try to save 10% of your earnings. If this is not possible to do immediately, Perez recommends starting with a lower percentage and then setting a reminder in your phone or email to increase it in six months. Keep increasing it thereafter and use a retirement calculator to stay on track.
What’s the Greatest Social Security Myth?
Perhaps no Social Security myth is as pervasive as the one in which there is no more Social Security. Theories surrounding this myth range from a possibility of reduced Social Security benefits to the program potentially going bankrupt.
Presently, none of these theories are true. The idea that Social Security may “possibly” end cannot be the reason why millennials, or any other generation, don’t prepare their finances for retirement.
“Social Security and Medicare are two of the most popular entitlement programs in the United States with broad support from both major political parties,” Perez said. “Eliminating the program would be an extremely difficult feat to pull off.”
Since Social Security is likely to survive, it’s critical that millennials contribute to their retirement savings and diversify their retirement income buckets now. Saving and personal accountability aside, Perez said there are a few silver linings of what the future of Social Security might look like for millennials.
“It is true that in order to pay Millennials the level of benefits currently promised, Congress would need to legislatively increase funding, which they could do in a variety of ways. Another option is that they might reduce retirement benefits in a variety of ways but the program is likely to survive, albeit with some tweaks, and possibly some big ones,” Perez said.
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