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Financial Planning, Protection and Retirement (Part 2)

Updated: Aug 21, 2022

Editor’s Note: In part two of Ted Norwood’s post on Social Security, financial planning, and retirement, the author explains the various Social Security benefits and impact they may have on your financial status. (Click here to read Part 1 of this post.)

The Basics

The basic principles are straight forward. For your retirement, start as soon as you can with whatever you can, even if it feels insignificant. For your personal finance, you want to eliminate debt in order of interest rate (get rid of the highest first). Next, you want to build an emergency fund to cover three to six months of lost income. Then you start saving more, putting as much in retirement as you can.

You can (and should) learn, whether you prefer the strategies of Dave Ramsey, Suze Orman, or Gaby Dunn. There are many other financial gurus, too. These topics can be boring, so try to find someone that makes it interesting to you.

There are a lot of things to think about as you fill in from that basic framework. Life insurance protects your family from your death. Long-term disability insurance protects you and your family financially from work absences due to injury or illness. Other insurance products can help with the potentially expensive elements of aging.

Many employers offer different types of retirement benefits, often 401(k) plans, that help prioritize retirement investing. There are individual retirement accounts (that’s what IRA stands for.) There are accounts to save money for your children’s educations. You can buy health insurance for your pets (I’m not recommending it). You can invest in high end art. (Not a recommendation). You can become a Crypto Bro. (That’s a personal choice.) There are more options than ever, and I’d be remiss if I didn’t remind you that some people keep cash hidden in their homes. After all, there is always money in the banana stand.

Add in Social Security, Starting with Retirement

Social Security enters the picture as you consider these options. A good place to start is with the retirement benefit. When you consider what you want your retirement income to be, you can factor your Social Security retirement into it. You should remember that your Social Security retirement projections assume that you keep working and making the same income. They also assume you keep paying into Social Security. That could go up or it could go down (relatively).

The other factor is that you probably can’t save too much for retirement. It is one area where more is better. Some people choose to save without thinking about Social Security, and then the Social Security retirement benefit is a bonus. These choices depend on your personal decisions and situations.

It is good to know that Social Security benefit will be there. All personal investments carry risk, and market or economic crashes at an inopportune time can impact your retirement, especially if you don’t have much time for it to recover.

Add a Dash of Disability and Life Insurance

Social Security also helps you cover your disability and life insurance needs. There may be times when Social Security benefits alone is enough. Almost always, Social Security works better as a just a piece of your protection. Maybe you don’t need as much life insurance because your family could get survivors’ benefits from Social Security and a death benefit. You likely wouldn’t want to only have Social Security, but this consideration could help you budget your protections.

Too often people prioritize life insurance over long-term disability insurance. People don’t realize how likely they are to need disability insurance. One in four workers will experience a period of disability before they retire. Prioritizing your income protection strategy could allow you to get a private disability insurance policy or supplement a policy through your employer. Social Security has a disability insurance program, but it works best in tandem with private insurance.

Social Security’s disability program is strict and slow. It often takes a year or two to get benefits. Private policies pay benefits more quickly and have less stringent requirements – at least for the first two years of disability (usually). Many private policies, especially group policies through your employer, offset any Social Security disability benefits you receive. This means that the private policy will reduce your payment when you are approved for Social Security disability benefits. This arrangement allows you to get quick payments from the private disability carrier while keeping the cost of the insurance policy reasonable.

Having represented people in both situations, the difference for people with private disability policies is tremendous. Although I have a bit of bias, I can’t recommend having private disability (usually through your employer) strongly enough. It is a wonderful example of the private sector and government interacting effectively.

Cost of Living Adjustments

One of Social Security’s overlooked features is the annual cost of living adjustment (COLA). Adding a COLA provision to your private insurance is often prohibitively expensive. There also isn’t any COLA for your financial investments. Social Security provides a COLA with its retirement and disability payments. Over the long period that someone may receive retirement or disability benefits, those COLAs really add up and protect recipients from inflation.

Social Security is an Integral Part of your Finances and Retirement

Social Security is the start of your financial planning and retirement. It works best if you partner it with other retirement plans, disability and life insurance, and investments. That isn’t possible for everyone. But if you can, you should.

When Social Security is just a piece of your plan, it mitigates the risks in your private retirement or financial planning. Private investments always carry risk, although the risk varies by investment and time periods. Social Security is safe – possibly safer than hiding money in your house!

Finally, thinking back to the idea that the Social Security Administration is like an insurance company – it is an insurance company you can impact. You get to vote for your politicians, and they can make big or little changes to improve Social Security. For example, there is a movement now of people that want to eliminate Social Security’s six-month elimination period (a waiting period before benefits begin). Congress recently eliminated that waiting period for claimants with ALS. Many now want that same advantage. The public has a say in how Social Security evolves.

So keep Social Security in mind when you think about financial planning and retirement. Hopefully, you can save enough on your own that Social Security is just part of your safety net or retirement.

Ted Norwood is the chief legal officer of Integrated Benefits, Inc. and has represented Social Security Disability claimants in every state. He graduated from St. Louis University and the University of Missouri-Columbia Law School. He lives in St. Louis, MO with his wife and two daughters.

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