financial planning for retirement

financial planning for retirement

             Financial planning is a crucial tool to help an individual during stormy days. Thus, evaluating once current income and future financial states using various variables is essential. One can make a financial plan to help save for a master’s education, health, purchase of a car, a house, or for a vacation. This paper will be looking at financial planning for retirement by analyzing the viability and sustainability of the social security program.

A social security program is a program undertaken by the government to provide financial assistance to citizens with no income and inadequate income. Social security is also welfare or social safety net. The enactment of the social security program is after the assertation of the Universal Declaration of Human Rights in Article 22. The declaration states that every member of society has a right and is justified to social protection. Also, every member of the community should have a right to develop themselves through culture, work, and social welfare. Social security programs and aid offer resources such as food, shelter, and promote the health of a vulnerable population, especially to the children, disabled persons, the sick, and the elderly.

According to the Social Security Administration, about sixty-three million Americans have received a total of one trillion benefits in 2018. In most countries, the government and most employers offer social security programs to retirees through pensions and retirement funds based on the organization agreement. A viable and sustainable social security program will be useful to ensure that even generations to come will benefit from social security schemes.

History of Social Security Program

Social security act is one of the provisions welfares that is implemented to pay retired workers with an age of sixty-five and above a continuing income. The bill was enacted in 1935 by President Franklin D. Roosevelt. The program involves workers funding their retirement benefit through a part of their income tax being saved for their retirement account. At first, the social security program would offer retirement benefits to only retirees who have a history of earning income. Those retirees only work for the government or major organizations. However, in 1939, two amendments are passed where the dependents and survivors of those with earned social security will benefit from the program.

In 1940, the government started to roll out monthly benefits to retirees. In 1950, congress pass legislation where even the disabled population benefit from the program; this is meant to offset inflation effects in the economy. However, in 1970, the economy is worsening, and the program faced a financial crisis in 1980. Thus, the current president, President Regan, appoints Greenspan Commission. Greenspan commission is supposed to make a recommendation to Congress on the policies that will settle and address the financial crisis on the program. Following commissions evaluation on the issue, the commission has offered two recommendations. One of the proposals is to increase the retirement age from sixty-five years to sixty-seven years. The second recommendation is to tax the benefits partially. The changes are the sustainability plans at that period that are to increase the total reservation of retirement funds over the next coming decades. The following decades will be when the baby boomer population will be expected to retire and likely to drain the reserves.

Future problems of the social security program

I think the major problem that may affect social security programs is the demographic shift and changes. A declining birth rate and increasing life expectancy from 75 years in 1950 to 82 years in 2000 characterize the U.S aging population. Both of these demographic changes will impact the retirement benefit remitted. A decreasing birth rate means there will be less labor force in the future. Therefore, it means that there will be less retention of payroll taxes from the current labor force. The payroll taxes of an existing workforce is the one used to pay for retirement benefits of the retirees. Since the process of paying for retirement benefit involves paying a monthly stipend to retirees using the young generation earning taxes. The social security program system is a pay-as-you-go process. Thus, having a reduced birth rate will reduce taxes reserved, which will negatively impact the benefits rolled out to the increasing retiree population.

Another major future problem is the increasing baby boomer population from the year 1946 through the year 1967. The United States experienced the highest birth population of seventy-six million. By the year 2013, the first baby boomer generation attained the age of sixty-seven years, which is the required retiring age to receive a retirement benefit. The last baby boom generation to retire will in the year 2034. However, from the year 2008 to the year 2034, the number of beneficiaries will have increased from thirty-nine years to seventy-five years. Thus, the recipient to worker ratio will also be affected.

The number of a person benefit from the program to the number of workers paying into the program will increase from 35 per 100 in 2014 to 44 per 100 in 2030. I do not forget the reduced birth rates of 3 births in a family in 1950 to 2 deliveries in 2000 and likely to reduce as time goes by. Hence, the baby boomers generation retirees will have a less working population that will be paying for their benefits, which will bring a financial constraint in social security programs.

The demographic shift will cause a financial crisis due to the revenues reserved is minimal, and not unless they’re better policies are implemented. According to the National Academy of Social Insurance, Trustee report since the year 1935 total taxes collected are $19.9 trillion. By the end of the year 2016, a total of $17.7 trillion has been paid out, leaving $2.8 trillion in the reserves. These data show that while the baby boomer was working, the total taxes reserved were quite high compared to the current working population. The baby boomers population contributed a lot to the reserved fees. Since there is also a high population of retiring baby boomer generation, the reserved taxes are quickly getting depleted. The remaining $2.8 trillion in the trust fund is quite little to serve the remaining baby boomer generation retirees. Thus, better policies and initiatives need to be formulated to increase the trust fund since, by law, the social security program cannot borrow money to fund the beneficiaries.

Future of social security programs.

Social security programs have proved to be a reliable, effective, and efficient stronghold for retirement income. The federal government governs and controls social security, an entity that will never go out of business and has the power to tax. The involvement of the central government in social security gives a working population the confidence of receiving their benefits in retirement. Fiscal responsibility is a critical feature of social security. However, some of the working people do have savings and pension plans for their retirement benefit. But what are the initiatives that can be taken to provide adequate retirement benefits that are secure, efficient, and just?

An individual can have various retirement benefit initiatives for their stormy days in retirement. The various initiatives are social security,  pension plan, also referred to as defined-benefit plans, a 401k plan, and an Individual Retirement Account. Based on one’s earning income, one can have all the various schemes, but one can be limited to all four if he/she is a low income or high income.

Pension Plan

A defined-benefit plan or a pension is a form of retirement benefits plan where advance decisions on the amount one receive in retirement. The employers create an individual retirement account for the employees for future benefits. The government set rule and regulation that governs employers decisions on contributions to be made by the employees and how they invest the contributions. However, the pension plan is not as ideal as social security, and hence further changes will polish up the pension plan. Such recommendations will be the government should impose a few obligations and risks on employers. Since most employers avoid financial risks and fiduciary duties of guaranteeing pension.

Also, small employers should be encouraged to offer pension since only a few do offer. Besides, organizations need protection from inflation. The social security program analyzes the trend of wage growth and the cost of living before disbursing benefits. In a company pension, there is no inflation indexing. Also, policies need to be implemented to ensure that a pension plan is reliable as social security programs. Since if a company goes bankrupt, relocates to abroad, or bought and sold the employees’ pension is at risk. A sustainable pension plan will allow employees to enroll in the company’s retirement plan. Hence, increasing alternatives for a retirement plan for the worker.

401K Plan

A 401k plan is an individual retirement savings account offered by companies. Organizations with mainly five hundred plus employees provide a 401k plan. However, even small organizations do offer the program. In a 401k plan for 2019, an individual is limited by the Internal Revenue Service’s (IRS) to contribute to up to $19,500. While employees with more than 50 years are allowed to have a catch-up contribution of an extra $6,500 in their 401k plan. The contributions to a 401k plan for a 50-year-old individual will sum up to $20,000. There is no ideal amount to contribute to a 401k plan.

There is no ideal amount to contribute. However, based ones one’s retirement goals, family decision, available resources, one can choose what to contribute. There is a common notion that one should contribute 10% of their gross earnings. Contributing 10% to 20% of one’s total earning can allow one to have decent retirement saving if they start early in their twenties. However, some organizations offer a 401k match, which is an ideal source of retirement income. A match is more like free money from the company. For instance, the most common match is 50 cents on the dollar. So, for every one dollar, an individual contributes to the company 401k plan. The company provides 50 cents. Match contribution is an initiative that every employer should take advantage of since it increases one’s unworked for retirement savings.

Internal Retirement Account

The more the retirement account plans, the better for an individual, thus having an Individual Retirement Account (IRA) will do good. An IRA is a tax-advantaged account; that is, it provides an individual with tax benefits such as tax exemption, for saving and investing for retirement funds. Investments held in the IRAs account include various financial products such as bonds, real estates, exchange-traded funds, and mutual funds. However, for one to have an IRA account, they must open with an institution that is approved by Internal Revenue Services such as a bank, a federally insured credit union, a brokerage company, and a savings and loan association. Also, individuals contribute to the IRA account through earned income only. Income from investments, social security benefits, or child support does not count as earned income.

There are various IRA accounts a traditional IRAs and Roth IRAs. The main difference between a conventional IRAs account and a Roth IRAs is that for tradition, there is a tax deduction, while for Roth, the contribution is not subject to deductions. Limit contribution for traditional and Roth IRAs as of 2019 is $6,000. An individual above the age of 50 can have a catch-up contribution of &1,000. However, there is a tax limitation in Roth IRA. An individual can’t contribute to Roth IRA if one earns a lot of income. Only singles with an annual income not exceeding $139,000 and married couples with an annual income not exceeding $202,000 can contribute to Roth IRA income as of 2020. Roth IRA is better than Traditional IRA since, during withdrawal, there is no tax deduction. However, if one violates the five-year rule after the first savings where one withdrawal before fifty-nine years and half the earnings are subject to taxation and penalties. If one withdrawal from their IRA account after attaining sixty years, their earnings are free from taxes and penalties.

Conclusion

A social security program is an act implemented to protect the rights and improve individuals, especially the children, disabled persons, and the elderly population. Social security program has proved to be efficient and effective in providing financial benefits to retirees. Efficiency and effectiveness are because the program is governed and controlled by the federal government. Also, the federal government takes an economic crisis, such as inflation and the cost of living. Baby boomers generation and demographic shift is the leading future problem likely to affect social security programs. Alternative retirement plans such as IRA, 401k, and pension plans will complement social security benefits. Each employee should take time to understand their organization’s retirement plans to subscribe to one. Early preparation for retirement is vital for everybody. Since after retirement, sources of income are minimal, and having savings will reduce over-reliance and dependence on people.