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Younger Americans Are Growing More Reliant on Social Security — but Should They Be?

Even though Social Security has been around for more than 80 years, many of today's workers fear they won't benefit from the program once it's their turn to retire. In a 2016 Transamerica survey, 77% of employees say they're worried about Social Security running out of money.

It's therefore surprising to learn that a growing number of younger workers are planning to fall back on Social Security during retirement. In a recent Gallup poll, 25% of Americans aged 18 to 29 say they intend to rely on Social Security to pay the bills once they stop working. That's nearly twice the 13% of younger workers who felt the same way 10 years ago.


Now in some ways, it's good to hear that younger workers aren't writing off Social Security, especially since, despite the rumors, the program is still more than viable. On the other hand, it does fuel the concern that millennial employees aren't saving independently for retirement, because they think Social Security will be enough to sustain them. And that couldn't be further from the truth.

An unhealthy reliance?

For the past 16 years, younger Americans have been consistently less likely than their older counterparts to acknowledge a heavy reliance on Social Security in retirement-- and that makes sense. In just a few years, Social Security will start paying out more in benefits than what it collects in tax revenue under the current system. Now thankfully, the program has some extra money stashed away in its trust funds, which it can use to bridge that gap. But according to recent projections, come 2034, those trust funds will be completely depleted, at which point Social Security will only manage to pay roughly 79% of scheduled benefits to future recipients.

Of course, getting 79% of scheduled benefits is better than getting nothing at all. But unless Congress intervenes with a fix, future beneficiaries are looking at serious cuts.

And therein lies the problem. Even without that 21% reduction in benefits, Social Security still won't suffice in helping future retirees stay afloat financially. At best (meaning, without a reduction), the program's benefits will replace roughly 40% of the typical worker's pre-retirement income. Most people, however, need at least 70% to 80% of their previous income to pay the bills once they stop working. This is due in part to rising healthcare expenses, dragging housing debt (a good 30% of seniors don't pay off their mortgages in time for retirement), and an abundance of free time that tends to cost money to fill.

In fact, in a recent study by the Employee Benefit Research Institute, 46% of newly retired households wound up spending more money, not less, than what they previously spent during the first two years of retirement. For 33% of seniors, this trend continued for a solid six years before spending started to wane.

While there's no need for workers of any age to write off Social Security completely, to rely on it as a major source of retirement income could be a recipe for disaster. And if younger workers don't ramp up their savings game, they may come to struggle down the line.

Take matters into your own hands

A recent Merrill Lynch study found that a good 42% of workers aged 25 to 39 have yet to begin putting money away for retirement. This means that nearly half of younger workers are missing out on a critical savings opportunity.

Funding an IRA or 401(k) early on gives you more time to take advantage of compounding, which is what helps savers turn a bunch of relatively modest contributions into a solid retirement nest egg. Case in point: If you put $300 into an IRA every month for 30 years, and invest that money at an average annual 7% return, in three decades' time, you'll be sitting on $340,000. That's a $232,000 gain. Wait 10 years to start saving that same amount, however, and you'll be looking at just $147,000 -- a decent chunk of cash, but less than half of what you'd have available by starting a decade prior.

If there's one advantage younger workers have over their elder counterparts, it's time, and those who start saving early on stand to amass strong enough nest eggs to more than make up for whatever shortfall Social Security comes to face in the future. So if your retirement strategy is to bank on Social Security in the absence of independent savings, it's time to come up with an alternate plan. Otherwise, you'll be putting your retirement at serious risk, to the point where you may not actually get to retire at all.

The $16,122 Social Security bonus most retirees completely overlook
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