Social Security benefits are the main income for most of the Americans aged 65 and older. However, the constant uncertainty surrounding these benefits raises concerns among individuals planning for their retirement. With headlines suggesting that these benefits are at risk, it’s natural for individuals to be apprehensive.
Discussions have been on the table in recent years, and have been encouraged in 2023, with doubts regarding the future of Social Security and the stability of payments for retirees and other beneficiaries, such as those who receive Supplemental Security Income (SSI), or Social Security Disability Insurance (SSDI).
What You Can Do if the Social Security Program Gets Cut
If Social Security benefits were to undergo reductions, it would have a significant impact on individuals’ retirement planning. Planning for retirement is already an intimidating job, but the potential decrease in Social Security benefits adds an additional layer of complexity.
If Social Security benefits were reduced, it would mean that retirees would have to rely more on their personal savings and other sources of income during retirement. To compensate for this reduction, individuals would need to save more on their own to maintain their desired lifestyle in retirement. How about investing in brick-and-mortar options? Your savings could, for example, buy a second house that you could rent in the future, and so you’ll have another income.
The exact amount you’d need to save would depend on various factors, including your current age, retirement goals, and the extent of the benefit cuts. Financial advisors recommend adjusting your retirement savings plan to account for potential reductions in Social Security benefits.
This may involve increasing your contributions to retirement accounts like 401(k)s or IRAs, diversifying your investment portfolio, and considering other sources of retirement income, such as pensions or part-time work.
Social Security Retirement Options: How Much Do You Have to Save?
Let’s consider a scenario presented by CFP Clifford Cornell, an associate financial advisor at Bone Fide Wealth. Imagine a 30-year-old woman earning $75,000 annually, with $20,000 already saved for retirement. Her plan is to retire at 65, with an annual expenditure of $40,000 and an expected lifespan of 90 years.
If Social Security remains intact, she should save $375 per month in her workplace 401(k), assuming a 6% annual return before retirement and 4% after. In a world where Social Security benefits are reduced by 50%, she would need to save $750 per month, doubling her savings rate. In the worst-case scenario where Social Security ceases to exist, she must save $1,125 per month, tripling her savings rate.
Challenges Over the Social Security System: Is It at Risk?
Social Security benefits are the main source of income for many older Americans. Without them, about 10% of retirees already live in poverty. If these benefits were to be significantly reduced or eliminated, this number could soar to nearly 40%. The average retired worker receives approximately $1,840 per month, making Social Security decisive for maintaining a decent standard of living.
Currently, around 10,000 baby boomers retire daily, and beneficiaries are living longer, resulting in extended benefit payouts. Furthermore, the declining number of workers paying into the system through payroll taxes has created a financial imbalance.
If no action is taken by lawmakers, the Social Security trust fund is projected to be exhausted by 2033. However, this doesn’t mean that benefits would vanish entirely. Workers would still contribute payroll taxes, and these funds would be available to retirees, albeit with significant cuts. The Social Security Administration estimates that if the trust fund runs dry, approximately 77% of promised benefits would still be payable.