Will your Social Security check be what you expect?
The Social Security Trustees finally released their long-awaited update on the program's finances on June 9. The report is 273 pages long, so I'll give you the highlights. In a nutshell, Social Security's current setup can't sustain retirement benefit payments in full beyond 2032. That's when the ...
Overview
The Social Security Trustees finally released their long-awaited update on the program's finances on June 9. The report is 273 pages long, so I'll give you the highlights. In a nutshell, Social Security's current setup can't sustain retirement benefit payments in full beyond 2032. That's when the program's Old-Age and Survivors Insurance Trust Fund is expected to run out of money. Now to be very clear, the depletion of that trust fund does not mean the end of Social Security. Social Security is funded by payroll taxes, which means benefits won't go away completely in 2032. But if lawmakers don't intervene, Social Security could be looking at broad cuts in roughly six years.
Read:The Social Security talk every 50-something couple needs to have
The operative word there is "if," though. See, this isn't the first time Social Security has faced a major funding crisis, and lawmakers have never allowed the program to reduce benefits broadly. But while Congress could come in and prevent Social Security cuts, that's not guaranteed. So, your best bet is to prepare for the possibility of cuts to the tune of about 22.%. Here's how.
Build your retirement income plan around a partial benefit scenario
If I were a gambler, I'd say there's probably an 80% chance lawmakers won't allow Social Security to cut benefits and a 20% chance they'll be slashed. But you don't want to go by me. If you're roughly five to 10 years from retirement, it's time to stop assuming Social Security will replace the same percentage of income it's supposed to. Instead, figure on getting about 78% of what you're supposed to get. (And if you're not sure what that number is, create an SSA.gov account to find out.) Once you calculate that smaller number, assess your other income streams. Those could consist of a pension (if you're lucky), an IRA, a 401(k), and other investments. Make sure you can manage your expenses even if Social Security pays you less.
Of course, one advantage of Social Security is that benefits are guaranteed for life. So you're building an income plan around partial benefits, look for other ways to line up stable paychecks.
An annuity may be worth considering. But for the love of surrender charges, make sure you understand what you're signing up for and exactly what fees and commissions you're looking at before committing.
Maximize savings while you're still working
If you're not retired yet, you may be in the midst of your peak earning years, which gives you an opportunity to boost your savings to make up for smaller Social Security benefits. In fact, you may want to do a 20-year projection to see how much income you might have to make up for. Let's assume your full retirement age benefit from Social Security is $3,000 a month without cuts. A reduction could reduce your monthly checks by $660.
Details
On an annual basis, that's a loss of $7,920 in retirement income. Over 20 years, it's a loss of $158,400. (For simplicity purposes, we won't factor in cost-of-living adjustments, which Social Security benefits are eligible for.) So now, the question to ask yourself is, "Can I boost my savings enough to make up a $158,400 shortfall?" Once you run the numbers, you may find that the path to getting there is easier than expected.
If you're 57 and want to retire at 67, investing an extra $1,000 a month at a relatively conservative 6% yearly return could make up that difference.
Of course, this is just one example of an income scenario. But once you run the numbers yourself, you can figure out what you need to do to make up for a potential reduction in Social Security.
Be flexible with your retirement timeline
If you're not quite at your final retirement countdown, you may have the flexibility to delay your workforce exit if the possibility of Social Security cuts truly has you spooked. Granted, this is not a decision you have to make now, since benefits are not being slashed tomorrow and lawmakers still have some time to come up with a fix. The key, rather, is to be open to a slightly later retirement date if benefit cuts become official and you're not confident your savings can cut it. Plus, if you push off retirement, you can potentially delay Social Security beyond full retirement age for larger checks.
After paying into Social Security your entire life, the idea of benefit cuts is frustrating and, well, kind of scary. But know this. Uncertainty around Social Security does not have to derail your retirement. The key is to develop a plan that allows you to pivot as necessary or find other ways to make up for a chunk of potentially reduced monthly income.
Related: Are Social Security benefits protected from inflation?
Source
Originally published at www.thestreet.com.
