Com_156_Final

Social Security and Retirement Planning Is retirement planning necessary or will Social Security take care of everything' Some people believe that Social Security will cover all of their after retirement expenses, but there are others that believe exactly the opposite. Retirement planning is important because Social Security is a pay as you go system and pays only a fraction of one’s average monthly income. The future is unknown, so therefore planning is of extreme importance. It is important to know at what age retirement will be a viable option. Knowing the approximate age retirement will happen is necessary when calculating expected expenses at retirement. When planning for retirement one must first determine his or her retirement goals. Retirement goals consist of items such as maintaining or improving standard of living, vacations, and much, much more. After retirement goals are determined, one can begin to calculate his or her retirement expenses. Retirement expenses include housing costs, food, utilities, and taxes, upkeep of home, insurance, and health care and medical expenses. When calculating retirement expenses it is important to adjust for inflation. To adjust for inflation use the following equation: Expected expenses at retirement = Current expenses x 1.04N (N is equal to the number of years to retire) (Axia College Week nine readings, 2011, Personal Finance, p. 385). According to Axia College Week nine readings, Personal Finance, p. 383 (2011), there are three steps that should be taken into consideration when planning for retirement. The first step is to estimate future retirement expenses. The second step is to subtract all expected income from employer sponsored defined benefit retirement plans and Social Security to arrive at the expected retirement income shortfall. The third and final step is to estimate how much wealth will need to be accumulated by the retirement date and how much should be saved each moth to reach that goal. Social Security is a pay as you go system, which means current payroll taxes are used to fund current benefit payments (Axia College Week nine readings, 2011, Personal Finance, p.391). According to Axia College Week nine readings, Personal Finance, pp. 391 – 392 (2011), based on current projections, tax inflows will start to lag benefit outflows in 2018, and trust funds will be depleted, which means all of the overpayments that have been put into bonds will have been cashed in by 2044. This means all of the money the federal government has borrowed from Social Security to pay for other deficits and made IOUs for will have to be paid back. In 20 years from now there will be only two workers to every one retired person (Axia College Week nine readings, 2011, Personal Finance, p. 392). The reason this will happen is the Baby Boomers will be retired, and the generations that have come after them have far fewer people in them. After putting all of these facts together, it is easy to see that this is not going to work out well. The most important reason it is important to plan for retirement is that Social Security pays only a fraction of one’s average monthly income over the top 35 years of earnings (Axia College Week nine readings, 2011, Personal Finance, p. 391). Axia College Week nine readings, Personal Finance, p. 391 (2011) states that the Social Security Administration must first calculate one’s average indexed monthly earnings (AIME), and then use the AIME to calculate one’s primary insurance amount (PIA), which is the monthly benefit amount one would be entitled to if he or she retired at the normal retirement age. One of the easier ways to estimate benefits is to use one of the available calculators on the Social Security Administration’s website, www.ssa.gov. Social Security Online (2011) contains three different calculators; quick calculator, online calculator, and detailed calculator. The first option is the quick calculator, which gives a rough estimate of Social Security benefits based on date of birth and current earnings. One distinct drawback to the quick calculator is it will not work for people under the age of 21. The second option is the online calculator, which calculates Social Security benefits based on date of birth and a complete history of earnings. The online calculator is more accurate than the quick calculator, but the most accurate is the detailed calculator, which is the third option. The detailed calculator requires an abundance of information, which includes date of birth and a detailed earnings report. To use the detailed calculator it must be downloaded onto a computer. Social Security Online (2011) provides a Social Security Retirement Planner. The Social Security Retirement Planner can help if someone is looking for information, already near retirement age, or close to the age of 65. There are six options available for those looking for information; find the right retirement age, estimate life expectancy, learn about Social Security programs, find what happens if working after retirement or if already a Medicare Beneficiary, and learn how certain earnings and pensions can affect benefits. There are four options for people already near retirement age; discover retirement options, information about how family members may qualify for benefits, find instructions on how to apply for benefits and what documents may need to be furnished, and apply for retirement benefits. There is one option available for those close to age 65; how to apply for just Medicare. Social is a big part of retirement, but there is a question people need to think about; will Social Security be all that is needed when retirement comes, or is planning important and needed' The facts given above show the planning for retirement is essential. Retirement planning is important because without it no one will know how much retirement will cost. Since Social Security is a pay as you go system, the people working now are paying the Social Security benefits that are currently being paid. When one is ready to retire, he or she needs to know the Social Security does not match average monthly income, it only pays a fraction. When deciding whether or not to plan for retirement remember to take into consideration the quality of life after retirement. Retirement planning is important because one must make sure there is enough money when it is needed and will last throughout the length of retirement.   References Axia College, (2011). Week nine readings; Ch. 14 of Personal Finance. Retrieved from FP/101 – Personal Finance course website Social Security Administration, (2011). Choose A Benefit Calculator. Retrieved from http://www.ssa.gov/planners/benefitcalculators.htm