Personal Finance

Should Gen Y count on Social Security?

What millennials should know about social security
What millennials should know about social security

Millennials have dim views on Social Security when it comes to their retirement.

Nearly two-thirds of millennials surveyed by T. Rowe Price said they believe they're more likely to win the lottery than to receive any money from Social Security. And a Northwestern Mutual survey found 73 percent of millennials expect to work past the age of 65 because Social Security won't take care of their retirement needs.

"The reality is when Social Security was put into place, the life expectancy wasn't in the 80s and 90s," said Chantel Bonneau, a wealth management advisor at Northwestern Mutual in Los Angeles. So it's not surprising that changes may need to be made.

But do millennials have reason to worry Social Security will be gone before they're old enough to collect?

Probably not. Even if Congress does nothing, the Social Security Administration projects it will have enough money from payroll taxes to cover three-quarters of benefits it has promised retirees after 2034 when its reserves are scheduled to run out. Of course, that doesn't mean you shouldn't save money for retirement too.

When to file for Social Security retirement benefits early

Here's how to save more:

Contribute to your 401(k). If your employer sponsors a retirement plan, like a 401(k), take advantage of it. That's pretax money taken out of your paycheck each month and set aside for your future. (Contributions are withdrawn from your paycheck before taxes are taken out.) And taxes aren't paid until the money is withdrawn from the account. It may be hard to give up part of your paycheck, but the long-term payoff is worth it because the money you contribute can grow exponentially, thanks to compounding.

"Always pay yourself first," said Shaun Dowling, director of wealth management at HFS Wealth Management in Dallas.

Meet your employer match. Not all employers offer a match. But among employers who do, the average is 4.5 percent, according to Plan Sponsor Council of America research. (Bonneau said the match can "range from 2 to 8 percent depending on the company.) So if you contribute 4.5 percent of your pretax paycheck to your 401(k), your employer will match that. It's free money, so don't leave it on the table. "If your employer is going to match you dollar for dollar, you've already made 100 percent on your money—and that doesn't even consider your investment returns going forward. That's a great deal," said Dowling.

The good news is that more millennials are contributing to 401(k) plans thanks to the rise of auto-enrollment programs. The bad news is that "the average default contribution rate for millennials who were auto-enrolled is 3 percent," according to T. Rowe Price. "That is not enough at all," said Bonneau. "That's the amount that many companies adopted when they first added the feature."

According to Bonneau and Dowling you want to aim for 20 percent to really maximize your savings. As millennials, time is on your side so if you can afford to put a larger percentage of your salary into your 401(k) you've got years and years for it to compound.

Shrinking Social Security advantage for couples

Open an IRA. Don't have an option to invest in a 401(k) or aren't eligible? Don't worry. Not every employer chooses to offer a 401(k) plan and sometimes you don't qualify for one, if you are part time, for example, or haven't worked long enough to qualify. If this is the case, the individual retirement account, or IRA, will be your best friend. You can invest pretax dollars into a traditional IRA, though you will pay taxes on withdrawals in retirement. You could also invest in a Roth IRA, in which you contribute post-tax dollars, but can make tax-free withdrawals in retirement. With both of these options, you can contribute up to $5,500 this year. (That's the combined limit for both types of IRAs, by the way. You can't put, say, $5,500 each into an IRA and a Roth IRA.)

It's a good idea to start saving as early as you can because time is on your side as a millennial and if you can't reach the savings benchmark goals then do what you can. The important thing is just to make sure that you're saving. Constantly challenge yourself to boost your contributions as you go. So if you salary increases so should the amount in your 401(k).

If you struggle with savings, Bonneau suggests a great goal to go by is "you should always be saving more than what your car payment is. If that's not the case, then it's a priority flip-flop—if you can't afford both then you can't afford the car."

This is part of a week-long series on the state of Social Security on its 80th anniversary.