For young investors, retirement might seem like a long ways away, but this is the best time to start preparing. In doing so, you aren’t just trying to pick the best assets to own, but you need to come up with a more overarching plan. If you follow these three tips, you will be on your way to achieving your goals.
1. Don’t count on Social Security
There are two reasons for this. The first is that Social Security doesn’t pay a lot. For instance, if you make $100,000 per year and plan to retire at 66, you’re stuck with about $25,000 per year. Clearly that’s not enough to cover your expenses, assuming you want to maintain your living standard.
Second — and this is especially true if you are in your 20s and 30s — you need to be prepared for Social Security to disappear. The program is simply not funded well enough to be sustainable unless contributions rise significantly or unless benefits fall drastically. For a long time, Social Security was in a surplus, meaning that the government took in more money than it paid out.
But it didn’t invest the surplus: It spend this extra money. Right now the government’s unfunded Social Security liability exceeds $17 trillion, and Social Security payments exceed all other government’s annual expenditures. This deficit will only be exacerbated as more baby boomers retire: The number of working Americans supporting each retiree will shrink as the population ages, and this will only put strain on the system.
This doesn’t mean that the system will collapse overnight, but it does mean that we will start to see Congress take measures to increase Social Security income and decrease payouts. For those who plan on retiring in at least 20 years, your best strategy is to assume that the program simply won’t be there, or that its benefit will be minimal. So suck it up, pay the Social Security tax as if it were just another tax and not an investment in your future, and prepare for your own retirement.