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Life in Retirement
The economy is healing but many people are still hurting when it comes to their paychecks. You might be scrutinizing your deductions more closely than ever. Ever wonder about FICA? What’s up with all of the tax deductions? You might even to be tempted to forget about retirement to manage the daily financial responsibilities. Don’t do it. Thinking about retirement allows you to plan.
FICA is used to fund Social Security at a current rate of 7.65% paid by the employer and the same percentage also paid by the employee. If you are under 30, retirement is likely one of the last things that is on your mind. Most of us are just glad to have that good ole paycheck so we can live the adult life and buy the toys we dream about when we’re working. Many of our parents have mostly passed down this attitude. The only problem with this is that our parents had the luxury of working for companies that provided great pensions and social security was a guarantee.
In 1935, Congress passed and Democratic President Franklin D. Roosevelt signed into law the “Social Security Act.” This law created “a system of Federal old-age benefits” for workers and their families. In 1956, the law was amended to also provide disability benefits (Medicare). Social Security is composed of two separate entities: The “Old-Age and Survivors Insurance” program and the “Disability Insurance” program. Each program has separate finances handled through two separate trust funds.
As time has gone by employers have frozen or completely dissolved pensions because they have become too costly. However, most of our collective and individual spending habits force many to prolong worklife and for millions, even mean working past the official retirement age. Some companies, in an effort to assist employees with retirement, have instituted 401K or 403b programs, which the employee also contributes. It’s critical to participate in these programs when available, even if matching funds are dollar for dollar or not. Consider it a pre-taxed forced savings that will serve you and your family in the longterm. It’s equal to paying yourself first.
Social security benefits should be considered a supplement to retirement income. Social security benefits are generally increased each December based upon the rate of inflation in the previous year. There was an increase in 2007 and 2008, 2.3% and 5.8%, respectively; however, there were no increases in 2009 or 2010. Therefore, recipients of social security benefits are living in 2010 with 2008 wages. With no increases in the past two years, it is imperative that you seriously assess the ability to live comfortably on social security when you are without your “regular paycheck.”
* As of 2010, Social Security pays an average of $13,968/year to retired individuals. The U.S. Census Bureau’s poverty threshold for individuals over 65 years of age is $10,289.
* As of 2010, Social Security pays an average of $22,704/year to retired couples. The U.S. Census Bureau’s poverty threshold for couples over 65 years of age is $12,982.
In recent years, the U.S. government has had much discussion and debate regarding the demise or reduction of the social security program. Preparing to retire at a “goal age” should be done as early as possible, accounting for medical costs, retirement expenses, retirement goals, etc. Where do you want to live? What if you are medically disabled? What about a spouse or partner? Will your home be paid off? It is likely that social security in its current state will change in future years in order to become sustainable for future generations. Social security benefit payments, as noted above, may not provide a comfortable viable life sustaining income. Social security is not a guarantee and should only be viewed as supplemental income. Plan ahead. You have been warned.
Ronald Wadley is a Director, Financial Planning & Analysis for a non-profit member based organization in Chicago, IL and contributor to healthyblackmen.org. Data for this article referenced here.