Dave Ramsey, a personal finance author and radio host, explains what’s ahead for Social Security in the next decade. He offers his views on how much current workers should count on it when they retire. Social Security’s combined trust fund reserves will run out of money in 2035.
Until then, the reserves will make up the difference between income and costs. After the reserves are depleted, the program’s income will still be able to pay about 80% of its promised benefits. This will happen only if Congress fails to make adjustments.
Given the uncertainty of Social Security’s future, Ramsey believes workers should understand that it’s their own financial responsibility to plan for their retirement using other means. He emphasizes investing 15% of income in growth stock mutual funds through an employee-sponsored 401(k) and a Roth IRA. Ramsey clarifies his opinions on guidelines when using this investment strategy for retirement savings.
Regarding the employee-sponsored 401(k), investing up to one’s employer’s match percentage is not enough. One strategy designed for success is to invest money beyond your company’s 401(k) match in a Roth IRA.
Social Security and retirement planning
Contributions to Roth IRAs are made with after-tax money, so as those investments grow in value, they grow tax-free. This approach is crucial because it can increase savings, particularly if you retire in a higher tax bracket than when you initially invested the money. Ramsey also discusses the timing of claiming Social Security benefits.
Generally, the longer one waits to claim benefits, the larger the paychecks. However, Ramsey suggests an approach that can result in retiring earlier and making more money from Social Security benefits in the long term. If the wealth accumulated in your 401(k) and Roth IRA is sufficient by the time you retire, you can invest the money from your Social Security checks and watch it grow during retirement.
For example, Ramsey explains that if you were to invest $700 a month from age 62 to age 77, that would be 15 years of investments that could potentially result in another $318,000. This strategy is particularly relevant since the average American life expectancy is 77 years old. If you live to that age, you may receive more money from Social Security by claiming the benefits at age 62 and investing the money, compared to working past age 62 and waiting for a higher monthly benefit.
Ramsey underscores that relying solely on Social Security checks during retirement is not enough. Proper planning and investing are essential to ensuring financial security in later years.
