MoneyLife

Is Social Security the Best Financial Safety Net?

By Anna Yen

If you’ve ever looked at your paystub, you might have noticed that taxes are taken out to fund Social Security. Social Security benefits provide income protection due to retirement or disability. Around 71% of Social Security beneficiaries are retirees and 12.6% of beneficiaries are on disability. 

While receiving benefits from a Social Security safety net might be your go-to plan, is social security the best financial safety net alone? For most, Social Security alone isn’t enough. You should have other safety net strategies to cover all of your bases. Seeking employment is not always an option, so preparing for the unexpected in other ways will keep you from being blindsided.

Let’s dive in and take a look at additional safety net strategies you should put in place.

Why Social Security alone isn’t enough financial protection

Having a government safety net helps pay the bills, but the average Social Security benefits only amount to $1,429.13 per month. Needless to say, most people can’t survive on benefits alone. 

The average Social Security benefits don’t even cover rent in a high-cost city, let alone emergencies. After accounting for inflation, the gap between the cost of necessities and what Social Security benefits can provide widens even further.

How do you build a solid financial safety net

Relying on a government safety net to deal with life’s nasty surprises isn’t ideal. Similar to investing, diversification is the key to strengthening your financial safety net. You can’t rely on Social Security, savings, or insurance on their own. Life is full of surprises, and you’ll need to go in with backup to protect your wallet. Reduce your risks by having a few of these measures in place. 

5 financial safety net portfolio investments you need 

At a minimum, your financial safety net should include the following. 

1. Sizeable emergency fund 

If you get sick tomorrow or your car breaks down unexpectedly, how do you plan to pay for the expenses? Unless you have an emergency fund, you may have to sacrifice your regular spending money, borrow from a friend, or take out high-interest loans. 

Using your own money for emergencies will give you peace of mind because you won’t be indebted to anyone else, which is why building an emergency fund is crucial. The general rule is to save three to six months worth of expenses in a separate account in case of emergencies. 

It’s preferable to put your savings in a high-interest savings account to combat inflation. If you are a freelancer or you’re self-employed, having a savings that amounts to at least nine months worth of expenses is safer. 

What if saving that much is impossible or you have debts to pay? Research suggests that you are less likely to experience hardship in the next six months by having at least $2,467 in savings. 

2. Long-term disability insurance 

About 25% of 20-year-olds run the risk of losing their income-generating talents due to a disability. If you suddenly were out of work, how would you survive?

Is your Social Security the best financial safety net? Or would you have to dip into your retirement money to get by?

About 70% of SSDI applicants get denied on the first application and appeals can last two to three years on average. Long-term disability insurance provides faster and more adequate supplemental income than what SSDI could provide. 

Insurance premiums could cost anywhere from 1% to 3% of your income. And if you’re employed and your employer offers both short-term and long-term disability, try to pay for both.  

When choosing disability insurance, go for a cover of around 60% of your pre-tax salary. Since disability insurance is tax-free, the benefit you will receive could cover your take-home pay.

Since the average disability lasts for about 31.6 months, it’s best to look for a policy with a benefit period of at least five years just to be on the safe side. 

3. Term life insurance to cover 10x your annual salary 

How will your loved ones manage if you pass away without warning? Life insurance takes uncertainties out of this question by allowing you to provide for the people who outlive you. 

Unfortunately, life insurance is not a priority for most Americans, and it often ends up being an afterthought. Life insurance could help your spouse pay for your mortgage or send your kids to college. 

The amount you’ll pay for life insurance depends on how much you want your beneficiaries to receive. Insurance costs also depend on your age, gender, and current health. For instance, insurance is more affordable when you’re younger and if you are female.

A 20-year term life insurance with a $500,000 cover costs around $30 per month for a 40-year-old-male and around $25 per month for a 40-year-old female. As for the cover amount, the rule of thumb is to get a cover worth 10 times your current salary. When in doubt, seek professional advice.

4. Health savings account 

Healthcare costs can set you back by around $11,582 per year, and costs only continue to rise every year. If you have a high deductible plan, consider opening a Health Savings Account. 

An HSA provides significant advantages but only if you contribute money to the account. With an HSA, you can enjoy a triple-tax advantage. You’ll contribute pre-tax dollars into your HSA, and not only is investment income tax-free but withdrawals for qualified expenses are also tax-free. 

So, if you have money to spare, consider paying the maximum HSA at $3,600 per year for yourself or $7,200 per year for family coverage. After all, HSA pays for many expenses including over-the-counter drugs, female hygiene products, LASIK, and more. 

5. Tax-advantaged retirement accounts 

You can find many tax-advantaged ways to save for your nest egg, including a traditional IRA, Roth IRA, or 401(k). At a minimum, if you are employed, try to invest enough money to receive matching funds from your company. 

Consider putting money in a traditional IRA or Roth IRA from there. Make sure you meet the income eligibility requirements for Roth contributions, which can be withdrawn tax-free at the age of retirement.

Since tapping into your retirement savings early could cost you more due to taxes, consider making small investments on the side. A great place to start is a fully-managed investment account with MoneyLion, which offers you the effortless ability to opt into auto-investing as a way of saving money for future needs.

Reaching financial security is always a work in progress

Working towards the gold standard of financial safety requires savings, insurance, and investments. Creating a diverse portfolio will reduce the risk of you getting into financial trouble if a crisis strikes. 

It’s never too late to get started with MoneyLion. If you are facing a sudden emergency but you don’t quite have your emergency fund or other financial safety nets in place, consider a Credit Builder Plus membership with MoneyLion. This full-featured membership gives you access to up to $1,000 in the form of a loan without having to pay exorbitant rates. 

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