Benefit cuts could happen fairly soon. But that doesn’t mean your finances are doomed.
You may have heard a rumor by now that Social Security is on the verge of going bankrupt and disappearing completely. Well, you can breathe a sigh of relief because that’s not true.
Yes, Social Security is facing a revenue crunch. And the program’s finances aren’t great. But the program also isn’t in danger of going away completely, so you can put that concern out your mind.
That said, Social Security cuts are a distinct possibility in the not-so-distant future. The reason is that in the coming years, the program expects to owe more in benefits than it collects in revenue due to baby boomers retiring in short order and handing over less payroll tax.
Social Security has trust funds it can tap to keep up with its scheduled benefits for a period of time. But once they run dry, benefit cuts may be inevitable. And as of now, it’s looking like the program’s trust funds will be out of money come 2034.
That’s clearly not the best news — though it’s not nearly as dire as the idea of Social Security going away completely. But many workers are worried about benefit cuts and what they’ll mean for them.
The bad news is that there may not be anything you can do individually to prevent Social Security cuts. But there’s one very essential move you can make to help ensure that those cuts don’t upend your finances or wreck your retirement.
Taking matters into your own hands
Lawmakers might find a way to prevent Social Security cuts. But that’s not something you can control.
What you can do, though, is make every effort to build yourself a solid nest egg. That way, if Social Security cuts happen, you’ll have more savings to dip into to compensate.
Now you may be thinking, “But I can’t afford to ramp up my savings rate all that much.” A small uptick in 401(k) or IRA contributions, however, could make a big difference.
Let’s imagine you begin funding your retirement plan at age 30 and continue doing so until age 67, which is full retirement age for Social Security purposes. Let’s also assume that you contribute $150 a month to your savings during that time.
If your invested savings deliver an average annual 8% return, which is a bit below the stock market’s average, you’ll end up with about $365,000. That’s certainly a decent chunk of money.
But watch what happens when you raise your monthly contributions to $200. Suddenly, you’re looking at retiring with about $487,000. And if you can make it $250 a month, you’ll be sitting on $609,000.
Consider what spending $100 less per month right now might look like. You may have to cut back on some of the things you enjoy. But also, imagine retiring with $609,000 rather than $365,000. Having an extra $244,000 to your name in retirement could make Social Security cuts far easier to cope with.
The idea of Social Security cuts may be frustrating and scary. But they don’t have to wreck your retirement at all if you plan for them and ramp up your savings rate accordingly.
