Ever since 1935, when President Roosevelt signed the Social Security Act into law, generations of retirees have enjoyed this supplemental source of income. However, millennials will likely not get the same level of benefit from the Social Security system that earlier cohorts received. The Social Security Trust Fund is projected to run out by 2035 (ssa.gov), but this does not mean that the program will completely stop paying benefits. Instead, the program will only be able to pay around 75%-80% of its promised benefits, since it is funding the difference in benefits of 20%-25%, with the trust reserves (ssa.gov). Millennials will still likely receive Social Security benefits, but at a reduced amount.

Today, Social Security replaces around 40% of a retiree’s past earnings, and the average benefit is about $1,615 per month (ssa.gov). Any amount of additional income needs to be made up with retirement savings, pensions or part-time employment. If Social Security benefits get cut by 25%, the system will then only replace around 30% of a retiree’s past earnings, and the average benefit would be about $1,211 per month, in today’s dollars. Since pension plans are almost all but a thing of the past for most non-government workers, millennials will need to withdraw more from their retirement accounts to supplement their post-working life style. The need for millennials to distribute more from retirement accounts may pressure them to save more. There is a big problem with this however, as millennials maybe finding it harder than any other previous generation to squirrel away money for their golden years. Student loan debt, expensive housing/rent costs, inflated prices, child care costs and decreasing real wages, have all made it much more difficult for millennials to save for retirement.

Even so, there are steps millennials can take to help secure a brighter financial future. First, they should prioritize paying off debt, as this would then help them free up the discretionary income necessary to save for retirement and build up an adequate emergency fund. Second, they should take advantage of employer matching through retirement plans at work, as this is free money which should not be left on the table. If someone has a 401K with a 3% dollar for dollar match and they contribute 3% of their earnings to the plan, that individual just made a 100% rate of return on their money. Finally, millennials should discuss with their financial/tax professional whether a Roth IRA or Roth Retirement plan offered through their employer would benefit them. With Roth accounts, one doesn’t get a tax deduction on contributions, but any growth in the account can be used tax free in retirement, after age 59 ½. Social Security benefits could be taxable, depending on the amount of other income one has, which makes the Roth account even better than Social Security. The ability to avoid paying taxes on the growth of an investment makes the Roth account an attractive alternative for millennials looking to supplement their Social Security benefits in retirement.

The information provided here is for general informational purposes only and does not consider your particular investment objectives or financial situation and does not make personalized recommendations. Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Cadaret Grant & Company, Inc. This material is not intended to replace the advice of a qualified tax adviser or legal counsel. Individuals should contact their own tax professionals and attorneys to help answer questions about specific situations or needs prior to taking any action based on this information. We believe the information provided is reliable, but do not guarantee its accuracy, timeliness, or completeness.

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