Social Security
History of Social Security and its Evolution
The want for economic security is no new trend. We’ve laid out the evolution of Social Security and how it’s developed into the program it is today.
Allocation to Social Security for Just a Part of Retirement Income
Published August 12, 2017
For most Americans, Social Security only accounts for a portion of their retirement income. Here’s how you can fill this gap to ensure you have enough income during your golden years.
- For individuals aged 65 and over in the top quartile for income, only 18% of their income during retirement is from Social Security
- Contribute to your Personal Pension which provides you guaranteed income during your retirement years
According to the Social Security Administration, individuals aged 65 and over in the top quartile for income (an average of $78,180) received only 18% of their income from Social Security.
So what makes up the remaining 82%?
The Three-Legged Stool
The old retirement adage says that we should use the three-legged stool approach to prepare for retirement:
- Social Security – This is the government’s retirement plan for us. As long as you’re working (to earn the credits required addressed above) and paying taxes, you’re earning Social Security credits. When you retire, you’ll start receiving monthly Social Security income that will continue for as long as you’re alive.
- Pensions – This is the form employer retirement plans used to take. They provided a steady monthly paycheck no matter what happened in the market and no matter how long you lived. Because Social Security only covers, on average, 40% of one’s retirement expenses, people leaned on pensions for the rest. The problem today is that the second leg of the three-legged stool is wobbly or gone. Instead of offering pensions, employers are providing 401(k)s and matching contributions, which helps with the third stool.
- Personal Savings – So that you have access to money outside of, and beyond, monthly Social Security and pension checks, you need to save on your own. This money is generally invested differently to serve two purposes. First, money invested in liquid money market or savings accounts provides a cushion and access to extra cash in case of emergency. Second, money beyond that can be invested in the market for a high potential return. This is the money you’re comfortable losing.
But, we see these figures changing as time progresses, so we want to hone in on other ways to establish a steady income throughout retirement. Here’s a rundown of what they might be:
1. Managed Payout Funds
Managed payout funds are a way of providing a steady monthly income that keeps up with inflation. The allocation of payments may change over time to avoid eating away at the principal investment payment, which brings us to a downside of managed payout funds: they don’t provide a guaranteed lifetime stream of income. They can also expose investors to downside risk due to high allocations toward equities. Nevertheless, this is another tool for generating retirement income.
2. 4% Withdrawals from an Investment Portfolio
The 4% Rule was born in the ’90s when financial planner William P. Bengen concluded that someone who started withdrawals between 1926 and 1976 could make the portfolio last for at least 30 years by taking an initial 4% withdrawal and adjusting it for inflation each year. It’s a oversimplified rule for those looking to live off their own investments. However, after the market collapses in 2001 and 2008, researchers fear that 4% may be too generous a rule. Instead, people are opting for dynamic withdrawal strategies that evolve alongside the market.
3. Enroll in the Personal Pension
Your Personal Pension is backed by insurance companies which guarantee that for every dollar you contribute, you will receive a certain amount of income every month starting when you retire. Unlike an income annuity, the Personal Pension allows you to contribute incrementally, in smaller amounts and at a younger age, similar to the way you’d put aside money in your savings account or 401(k). You can use our Diagnostic Tool to project your income needs in retirement based on some basic information.
How Can I Start a Personal Pension?
A Personal Pension is a contract between you and top rated insurance companies. By making contributions to your Personal Pension over time, you develop a portfolio of guaranteed income available in retirement. Blueprint Income offers a Personal Pension account with the lowest minimum, $100. After opening an account, you can make subsequent contributions of $100 or more, each of which will increase your pension check.
Here you can see what contributing to a Personal Pension will guarantee you in retirement income. After just a few years in retirement, you’ll have recouped your initial investment, and the rest will be profit.
4. Purchasing an Income Annuity
Similar to the Personal Pension, income annuities provide a guaranteed lifetime stream of income during your retirement. However, instead of contributing over time, you pay a lump sum upfront to purchase your annuity from an insurance company. Then, the insurance company sends you a series of payments for the rest of your life.
Income annuities come in two forms: immediate or longevity. With immediate annuities you begin receiving payments within 12 months of your purchase, whereas with a longevity annuity you can choose to begin receiving payments at a date much later on.
A Qualified Longevity Annuity Contract (QLAC) is a type of longevity annuity (a.k.a. deferred income annuity) that comes with tax-deferral benefits. You can transfer the lesser of $135,000 or 25% of your qualified retirement account to a QLAC, which will then generate a future lifetime income stream starting after age 72 and before age 85. During the period in which income is deferred, the money used to purchase the QLAC is excluded from the required minimum distribution (RMD) calculation, a required annual withdrawal retirees must take from retirement accounts once they turn 72 years old.
How Can I Purchase an Income Annuity?
At Blueprint Income, we offer annuities from more than 15 top rated insurance companies. Click below to get real-time personalized quotes.
From there, you’ll get access to our annuity guides and team of specialists to help you analyze your retirement finances and walk you through the application process.
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