One of the biggest myths about Social Security today is that its bankruptcy is just a few years away. Don't get me wrong, there are funding issues that need to be addressed. But the fund is far from bankrupt.
For investors, the biggest takeaway is that no matter how the funding problem is solved, it will affect your wallet.
Historically, the Social Security fund has run at a surplus, and it's expected to do so through 2019. At that time it will need to start dipping into reserves to pay promised benefits.
Given the current income and payout rates, the Social Security fund will be able to pay 100% of benefits through 2034. At that time it will not go bankrupt, but benefits will need to be reduced by 25%.
That's because Social Security is funded mainly through this income source...
The Main Way Social Security Today Is Funded
Social Security today is funded primarily through payroll taxes.
There haven't been issues with funding for Social Security in the past because there have always been at least three tax payers for every beneficiary. But by 2034, there will be only two tax payers for every beneficiary.
This drop in the payee-to-beneficiary ratio is the cause of the upcoming deficit in Social Security funding.
Despite what many people believe, you do not fund your own Social Security benefits. Right now, that's what roughly 32% of Americans believe, according to a 2014 Pew Research survey. Instead, you actually fund your parents' and grandparents' benefits.
You pay taxes into the Social Security system, then those funds are taken to pay current retirees, disabled workers, and dependents.
To illustrate that you do not fund your Social Security payments, let's take a look at Average Joe. He makes $55,000 a year, works for 30 years, and has an 18-year retirement.
At $55,000 a year, Average Joe is contributing $3,410 a year into Social Security ($55,000 x 6.2% Social Security tax).
His employer will also contribute $3,410 a year into Social Security for a total of $6,820. If Average Joe is self-employed, he will contribute the full $6,820 to Social Security every year.
Over his 30-year career, Average Joe and his employer will contribute $204,600 ($6,820 x 30) into the Social Security fund.
At retirement, Average Joe will receive an average benefit check of $1,180.80 per month. The average retirement is 18 years and requires $255,052.80. That is $50,452.80 more, on average, than an individual pays into the system. The difference is made up by a guarantee from the government saying Average Joe will receive retirement benefits for the rest of his life and so will his widow, if she qualifies.
Because you receive more benefits than you pay into the fund, you are not actually using your money when you begin to collect Social Security. You are receiving benefits from the tax collected from the younger generation of workers.
And that's a massive problem with Social Security funding that's arising. The number of beneficiaries is rising, but the number of workers is not climbing fast enough to compensate...
3 Fixes to the Social Security Funding Problem
In order to fix the Social Security funding gap, expenses will have to be cut, revenue will have to increase, or both.
The first way to solve Social Security's funding problem is widely unpopular. Because this option is so unpopular across all demographics, it is not likely to happen. That solution is to cut benefits.
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So if cutting benefits isn't likely to happen, the other possibility is raising revenue.
The main ways Social Security can increase revenue is to raise taxes or raise the maximum amount of taxable earnings.
Increasing taxes will bring in additional revenue, but it will also limit an individual's ability to save on their own for retirement. That would make retirees more dependent on Social Security benefits.
The other option is to raise the maximum taxable earnings. Currently, that number stands at $118,500. Raising this ceiling would subject higher-income individuals to more Social Security taxes without being able to draw additional benefits when they retire.
While both options have drawbacks, it is likely that a combination of the two options to increase revenue will be implemented before Social Security benefits would be reduced.
Either way, your wallet will be affected in your working years or in your retirement. Possibly both.
But we have a way to grow your money in retirement so you don't have to worry about Social Security...
Protecting Your Retirement from Social Security
The first step to funding your retirement is to understand that Social Security can't fully fund your retirement. The reality is that Social Security is an insurance against lost wages. Because it was never intended to fund your retirement, it will not allow you to live comfortably in your golden years.
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The surest way to a comfortable retirement is to invest for it.
No matter your age, it's not too early or too late to grow your wealth for your retirement.
The first step is setting up an investing strategy to help take the guesswork out of your retirement portfolio. Money Morning Chief Investment Strategist Keith Fitz-Gerald recommends a portfolio structure of 50/40/10. In this portfolio, 50% of your investments are stable and well-known companies. This protects the core value of your investments and helps protect you from market volatility.
High-quality global growth stocks should make up 40% of your portfolio. By investing in growth stocks, you will give your money the chance to grow faster than the market and, more importantly, faster than inflation. This section is the main driver of portfolio growth.
The last section of your portfolio (10%) should be small companies that are higher risk but have higher profit potential. This section of your portfolio is where you swing for the fence. You will get a few home runs that can drastically increase your wealth, but you may also have a few strike outs. That's why this type of speculative investing should be such a small part of your portfolio.
Now that you know how to invest your money, the next hurdle is picking individual stocks. That's where the second investing tip comes into play. Fitz-Gerald recommends investing in "Unstoppable Trends."
These trends include health, scarcity, demographics, technology, energy, and war/defense. That's because these things will not disappear anytime soon, no matter what the markets are doing.
"More billionaires have been created around these six trends than any other trend not on the list in recorded history," said Fitz-Gerald last year while explaining the trends. You can see his full explanation and rationale here.
Investing in companies that are well-known and part of these unstoppable trends will help you build up the 50% core of your investment portfolio. Most of these stocks will be recession-proof and will still grow fast enough to out-earn inflation.
But that's not the only step investors can take right now to prepare themselves for retirement...
There are little-known investment havens, like the "26(f) programs," that give investors the opportunity to earn impressive monthly income on top of lump-sum payouts.
Programs like 26(f) have been a well-kept "secret" of powerful government officials and politicians.
And the best part of 26(f) programs is they allow people to "enroll" with just a small investment stake...
Fitz-Gerald has developed a short presentation that will show you how to take advantage of these 26(f) programs right now - exclusively for Money Morning readers. Click here to learn how to receive your free report.