Dave Ramsey warns Americans about Social Security, 401(k)s, IRAs
Big questions about Social Security persist.
Most U.S. workers face many day-to-day financial challenges, including paying mortgages or rent, car payments and gas, groceries and other important bills.
Often on people's minds, no matter their age, is the importance of saving for retirement and anticipating the role Social Security monthly paychecks will play in their retirement future.
Personal finance author and radio host Dave Ramsey does not hold back when discussing Social Security and how the federal program applies to Americans' retirement aspirations. He offers some blunt advice about which many would be wise to pay attention.
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One of the important things Ramsey emphasizes is that it is important to understand what Social Security benefits really are.
The monthly paychecks, for example, are fundamentally a financial mechanism to help people, to a small degree, replace some of the income they made while they were working.
But Ramsey has a big word of caution about the fact that there are many other ways — in addition to anticipating Social Security benefits — of responsibly imagining one's financial future in retirement.
Related: Dave Ramsey sends strong message on 401(k)s, Roth IRAs
American workers, for example, should take advantage of employer sponsored 401(k) plans. When an employer match is offered, it's free money.
Tax advantaged IRAs (Individual Retirement Accounts) also play a major role. People can put money away in these accounts in a number of ways, depending on whether they want to pay taxes on them now or when they withdraw money in their retirement years.
Dave Ramsey offers a major warning about Social Security benefits and the necessity of a little financial literacy on the subject. TheStreet
Dave Ramsey warns people on Social Security awareness
Ramsey considers the fact that many people simply do not take enough time to think through several realities that retirement savings entail. Others do.
For example, Ramsey suggests that there are a large number of Americans who believe their Social Security monthly benefit will be larger than it actually is.
He cites an Employee Benefit Research Institute study that found 62% of people currently retired said Social Security was a major source of their income, while only 35% of people currently working expected a retirement future where that would be the case.
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That's where Ramsey's word of warning comes into play.
"These 35% of folks are going to learn the hard way that what they don’t know can and definitely will hurt them when they retire," he wrote.
"Don’t let that be you!"
Ramsey explains his point of view that people should have saved and invested over the course of their working careers for money that will serve as their main source of income during retirement.
Related: Dave Ramsey warns Americans on Social Security, Roth IRA, 401(k)
Dave Ramsey explains Social Security, 401(k)s and IRAs
Because Social Security benefits will not be enough to cover retirement expenses alone, 401(k)s and IRAs increase in importance for American workers to prioritize.
The employer-sponsored 401(k) allows workers to decide on a percentage of their income they wish to invest. Up to a certain percentage, an employer match is a guaranteed 100% return on that investment.
That money invested is tax-deferred, so taxes are only paid during retirement when withdrawals are made.
Traditional IRAs and Roth IRAs are two options for investing additional money during retirement during one's working years.
Roth IRAs are funded with after-tax money. Because those taxes will have already been paid, by the time one reaches retirement withdrawals are made tax-free.
On the other hand, Traditional IRAs are funded pre-tax. That means the money invested grows, but taxes are paid in retirement when withdrawals are made.
"No matter how much or how little you expect to receive from Social Security, you need to start saving for retirement right now," Ramsey wrote.
"Retirement isn’t an old people thing. It’s a smart people thing."
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