How Social Security Privatization Could Change the Role of IRAs in Your Portfolio

Social Security privatization refers to a proposal that shifts the current government-run system to one where a portion of the money you normally pay in Social Security taxes would be diverted to a personal investment account that you would be responsible for managing. The goal is to allow Americans to maximize Social Security dollars.

Although the idea has been around for decades, it's taken on new heat as some worry DOGE cuts to the Social Security Administration (SSA) are the first steps in forcing privatization.

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There's no denying that saving for retirement as we know it would change if Social Security were ever privatized. Also impacted would be the value we put on other methods of savings, like individual retirement accounts (IRAs). Here's how some of those changes might present themselves.

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IRAs could become even more important

There's nothing like the knowledge that your Social Security benefits aren't going to be as much as expected to inspire you to find another way to build retirement savings. Chances are, IRAs will become even more critical as a primary vehicle for saving, helping you bridge the gap between income needs and resources.

Some may make IRAs their primary retirement funding source, as IRAs tend to provide more investment options than 401(k)s and other employer-sponsored retirement plans.

Contributions could be increased

If lawmakers do ever decide the current Social Security system needs an overhaul, there's a good chance they'll at least discuss increasing IRA contribution limits as a way for individual investors to bolster their retirement funds. While they're at it, Congress could consider enhancing catch-up options for older workers.

You'd have access to a more diverse investment strategy

IRAs offer such a wide range of investment options, you may base your investment decisions on what works best in tandem with other investment types, like a 401(k) and annuities. It's easier to come up with a balanced portfolio when you spread assets across several investment types. For example, if you have an employer-sponsored retirement plan that's heavy on higher-growth assets like stocks or real estate, you may want to balance those with a bond-heavy IRA.

The point is, no matter how your specific investment strategy works, IRAs give you one more tool to work with.

You might become a bit of an IRA whiz

Even if you've been investing for years, don't be surprised if taking greater control of investment decisions leads to a higher level of financial literacy and a deeper knowledge of how to make the most of an IRA. As you take on more responsibility for retirement savings, there's likely to be a heightened focus on financial education, investment options, and how to make the most of strategic withdrawals.

In addition, it's possible your employer will get on board by providing you with easier access to financial advisors and resources – a move sure to add to your knowledge base.

Long-term growth would take on greater importance

For the casual investor (particularly a new investor), the focus is often on short-term gains. However, knowing that your Social Security benefits will be less than expected may be enough to turn your focus to long-term growth instead. In turn, depending on your age, you may find that you have a larger appetite for taking risks with IRA investments to make up for any shortfalls in Social Security.

As mentioned, it's also possible that an IRA will be your "safe space" -- a place to invest in lower-risk assets. No matter how you use it, it's likely that it will be with an eye on the future.

You could decide to integrate annuities

With the knowledge that you're making up for lost Social Security benefits, you could decide to integrate annuities into your IRA. Annuities can be a good way to create steady, predictable income that complements other retirement investments.

In short, if Social Security privatization ever comes to pass, it's a good bet that IRAs will become an even more important part of the average investor's portfolio.

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