Replacement Income from Social Security Falling, Might Get Worse

November 4, 2020 — Data from the Centers for Medicare & Medicaid Services predict that Social Security benefits will provide an ever smaller portion of replacement income for retirees in the years to come. This prediction takes into account the delay in the Full Retirement Age from 65 to 67, along with increases in Part B Medicare premiums and federal taxation. The Centers sees the replacement level of income after those deductions falling from 41% in 1995 to to 29% by 2035. All of which puts more pressure on retirees for other sources of retirement income.

Pandemic might accelerate this. Employees and their employers pay taxes on their wages to fund the Social Security Trust Fund. As people lose their jobs and unemployment rises in the pandemic, and if it that were to persist for a long time, the Trust Fund would be negatively impacted. Social Security currently predicts that it only be able to pay 75% of benefits in 2035, but if a bad economy persists that percentage might even be smaller.

404(k) Balances growing. For those fortunate to have one, 401(k) balances increased through 2019. The median 401(k)/IRA balance for working households nearing retirement rose from $135,000 in 2016 to $144,000 in 2019. Since the stock market has also generally been up in 2020, it stands to reason that those balances are a little higher as 2020 ends. This information comes from the Survey of Consumer Finances by the Federal Reserve and summarized by the Center for Retirement Research at Boston College (CRR).

Not a lot of money. Though $144,000 sounds like a lot of money, it really isn’t when it comes to financing 20 or more years of retirement for a couple. A balance of that size provides a married couple with only $570 per month in retirement income – hardly enough for a great retirement, even with Social Security added on. But the bigger problem is that only half of households have any 401(k)-related assets.

Comments? Will your 401(k)/IRA provide enough for a comfortable retirement for you, along with Social Security? Do you have a Plan B if it doesn’t?

For further reading:
How Much Do I Need for Retirement? (25 Comments)