Do you spend more than you earn? The Social Security Administration (SSA) will soon find itself in this dubious position unless major changes are made.  Social Security is considered a "pay as you go" system, which means as money is paid into the system, the funds are used to pay benefits to current retirees. This system of "pay as you go" has worked fairly well since 1935 when it was signed into law. However, as baby boomers
age, and retire, there will be fewer workers paying into the system. In the 1960s, there were about five workers per beneficiary; currently, there are about three workers per beneficiary; and in 2030, there will only be two workers per beneficiary. This will put tremendous strain on the social security system as we know it today.

Workers paying into the system are shrinking in size for a number of reasons. The average size of families has become smaller because many people are waiting longer to get married and start a family. Also with medical advances, Americans are living longer in retirement and in many cases are retiring earlier, which means that social security benefits are being paid out for a longer period of time than in the past. Back in the 1930s, the average life expectancy was age 65. That is the exact age that social security benefits started! Do you think this was by coincidence? Today many people are living well into to their eighties and nineties and drawing more benefits than they paid into the system.

Although there are problems with the system, there is no need to panic. According to a study by the American Institute of Certified Public Accountants, there will be enough money to fund full benefits through 2032. For workers closer to retirement age, the social security dilemma may not be an issue. On the other hand, for younger workers it may be best to plan for reduced benefits or possibly no benefits at all.

Regardless of the state of Social Security, it is extremely important for workers to save for their retirement. Most financial planners say a person needs between 70% to 80% of his or her pre-retirement income to live comfortably in retirement. But for the average worker, Social Security replaces only about 40% (or less) of pre-retirement income. The balance must come from other sources such as employer-sponsored retirement plans, IRAs and personal savings.  Ultimately Social Security is out of your control, so it is important to focus on retirement saving to assure your financial independence at retirement.

Developing a comprehensive retirement plan can be a difficult task. A financial professional can help you develop a disciplined approach to saving for retirement costs. Together, you can determine which retirement approach will work best for your family.