In the past few decades, the burden of saving for retirement has largely shifted from employers to employees in private-sector jobs as pensions have been phased out and 401(k) plans have been phased in.
Unfortunately, many older workers were slow adopters, which explains why roughly 40% of retired Americans have only Social Security benefits as income, per the National Institute on Retirement Security.
Younger workers who have grown up with 401(k)s have less of an excuse for falling back on Social Security alone. But factors such as student debt, inflation, and excessive childcare costs make it difficult for younger workers to save.
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The Federal Reserve puts median retirement savings among workers under 35 at roughly $19,000, while those between ages 35 and 44 have a median $45,000 saved.
Younger members of the workforce have time to boost their savings ahead of retirement. And they need to recognize that doing so is more crucial than ever given the major funding crisis Social Security is facing.
Save Ramsey says Americans needs to understand Social Security better.
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Dave Ramsey warns workers not to rely on Social Security
Social Security’s primary source of funding is payroll tax revenue. Workers pay into the program annually up to a certain level of income.
But in the coming years, as baby boomers make a permanent workforce exit and start filing for benefits, that revenue stream will shrink, and Social Security’s resources will get strained.
Social Security can tap the trust funds it has to keep paying benefits in full for a period of time. Once those trust funds run out, which, based on recent projections, could happen in about a decade, benefit cuts may be inevitable.
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That’s precisely why in the context of Social Security, Ramsey warns, “Don’t count on it. Or don’t count on all of it.”
Now the reality is that lawmakers have potential solutions to Social Security’s funding shortfall. But each one comes with its share of repercussions.
That’s why Ramsey insists, “In its current state, the Social Security system is a mess – and you shouldn’t count on an inept government to fix it.”
Ramsey continues, “If by some miracle Social Security is around when you retire, you’ll have some extra money to work with. But understand, it’s your job to take care of you and your family, not Uncle Sam’s.”
Dave Ramsey wants Americans to understand Social Security’s role in retirement
One of the biggest misconceptions about Social Security is that it will replace workers’ pre-retirement wages in full. A general rule of thumb is that Social Security will provide about 40% replacement income in retirement for average earners.
Even without benefit cuts, that may not be enough for the typical retiree to live on. And if benefit cuts arrive, Social Security payments could be reduced by 20% or more, resulting in even less replacement income for the average older American in retirement.
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That’s why Ramsey insists that saving and investing independently for retirement is a better bet than sitting back and waiting for Social Security benefits to arrive.
“Your goal is to invest and have enough money saved in your retirement accounts so Social Security simply doesn’t matter. Whatever you get from Social Security will just be the cherry on top of the sundae you made yourself,” he says.
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The good news is that funding a 401(k) or IRA from a young age could produce a large nest egg, even if monthly contributions to that account are modest. Investing $325 a month over 40 years at a yearly 8% return (which is a notch below the stock market’s average) could result in a little more than $1 million in retirement savings.
Workers today should not only make every effort to save and invest for the future, says Ramsey, but also, read up on Social Security so they know what to expect. Working with a financial advisor could also be helpful for workers who need guidance on how much to save and how to invest.
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