Fear, uncertainty, and doubt. These three forces show up often when people talk about money and investing. It can scare people away from great investing opportunities and lead to bad decisions.
FUD was on full display in a recent FIRE Reddit post. The original poster mentioned that a financial advisor came into the office and said that anyone who is under 35 is in a grey area. The advisor claimed that Social Security won’t be around as we know it. The Redditor proceeded to question if it’s still worth it to contribute to a 401(k) plan after hearing that Social Security may be gone by the time young people reach retirement age.
While it’s easy to get overwhelmed by FUD, keeping a long-term perspective and focusing on what you can control will lead to better decisions.
Will Social Security Go Away
The financial advisor’s concern for Social Security is warranted. Fertility rates have remained below replacement level ever since the Great Recession, and for some countries, the trend has been taking place for decades.
It’s a fancy way of saying that people aren’t having enough children to replace retirees who leave the workforce. Fertility rates have continued to decline, resulting in a small number of young workers having to financially support a growing class of retirees. This setup can put financial pressure on Social Security, which depends on younger generations to fund older generations.
The government is unlikely to axe Social Security due to how unpopular the decision would be. However, keeping the Social Security program intact can result in more inflation. Young workers will likely face lower purchasing power by the time they are set to receive Social Security payouts.
Should You Stop Investing in a 401(k)?
The solvency of Social Security shouldn’t impact your investment decisions. It is almost always a good idea to invest in a 401(k) and accumulate other assets. You can also create a brokerage account where you can invest extra cash after reaching the 401(k) contribution limit.
You still need enough money in your portfolio to retire. Many people use the 4% withdrawal rule to assess how much they need. For instance, someone who wants to live on $100k per year needs a $2.5 million portfolio, assuming they withdraw 4% every year.
It’s critical to invest when you are young, and many commenters pointed this out. The top commenter asked the Redditor why any uncertainties around Social Security should stop them from contributing to a 401(k).
Expect Nothing from Social Security
This statement is not an indictment of the program. However, it’s better to plan your long-term financial goals as if you will not receive Social Security. That way, you have more than enough by the time you are ready to retire.
Expecting Social Security to bail you out is risky. That’s because the cost of goods and services can grow at a faster pace than Social Security’s cost of living adjustment. You may find yourself in a tight spot if you include Social Security in your 4% withdrawal rule calculation.
Act like you will never receive a Social Security check. Then, it serves as a nice little bonus if you end up receiving steady Social Security payouts.
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