Our parents grew up with the promise of Social Security when it came time to retire. Additionally the corporate environment was different and many businesses promised and provided pensions for their employees. This has changed dramatically in the last decade as the baby boomers are beginning to reach retirement age. Social Security brings up a lot of questions. Here are answers to the basics.
1. What is Social Security?
Social Security was first introduced during the Great Depression. It was a system that offered pay out if you paid into it while you were working. The system works by using the funds that are paid into it through tax deductions and sending out a check to those who are on Social Security. The system funds itself with the excess being saved until the current amount coming in is greater than the out go.
2. Will I be able to rely on Social Security?
The simple answer is no. There may be something different in place by that time, but you should plan that there will not be social security available to you. The Baby Boomers are getting ready to retire. The working population will shrink as they retire, and they will draw on Social Security. The work base will not be able to support the projected payouts and the government will start drawing on the fund itself. This will cause a change in the amount paid and the projected retirement age. You should plan for your retirement yourself.
3. Why do I have to pay Social Security if I may not benefit from it?
It is the law. Similarly to income taxes, you will need to pay the money. If you are self-employed you pay it with the self-employed tax. Otherwise your employer will withhold the money for you. If you need some sort of benefit to feel better about it, there is the fact that it will be less money that you will need to spend to help your parents out if their social security suddenly disappeared.
You should begin by taking advantage of your employer’s retirement plans. Then you can invest in an IRA. After that you can begin to invest in other areas such as mutual funds and real estate. This will help you to retire comfortably. There are specific retirement accounts available for the self-employed. You may also want to talk to a retirement planner.