Advisors must take Social Security’s problems into their calculations.
“The demographics and the promised real benefit increases are why the system is projected to run larger and larger deficits,” Entin writes. “There are just not enough future workers to pay into the system to maintain that pace of real benefit growth.”
The well-off, those with significant retirement income, are an obvious target for future cuts. But another advisor says unrealistic expectations about Social Security could also hurt those at the other end of the scale. Those without significant private retirement savings are running a big risk.
“Generally, I don’t want to see someone have more than 20 percent of their retirement incoming from Social Security,” says Charles Hughes, a CFP in Bay Shore, N.Y. “Some actually are depending on 50 percent of their income to come from Social Security.” That’s a figure he finds unrealistic.
“When people tell me they expect Social Security will be half of their retirement income, our discussion takes a different tack,” Hughes says.
“I tell those people that they will have to consider a lifestyle change; that [it] is very difficult to construct a retirement plan when so much is dependent on Social Security.”
Hughes fears that, with Social Security deficits continuing, some years there will be no cost-of-living adjustments.
Advisors need to anticipate problems with the program in the next decade, he adds. These problems could change the assumptions of retirement planning, according to Hughes.
“If Social Security is reduced,” he says, “we may well have to re-examine our assumptions about an initial 4 percent withdrawal rate in the first year of retirement.”