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Making Up for Social Security's Shortfall Is Easy

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The Social Security Trustees published their annual update of the health of the Social Security Trust Funds on Friday, and the news was somewhat better than initially projected. Improvements in the Trustees' projection methods offset worsening economic data and plan assumptions, keeping the Trust Funds' projected emptying date as 2033.

As a result, you still have around 20 years to prepare yourself for the day the Trust Funds run out of cash, cutting benefits by an average of 25%. You still have enough time to invest to make up the gap, and indeed, if you're already planning for a comfortable retirement, it's one that's easily covered.

Keep on keeping on
Indeed, while my Foolish colleague Dan Caplinger notes the futility of the projections given the reality of politics, for you as an individual, with proper retirement planning, you may not even notice it's gone. After all, even without Social Security's pending benefit cuts, the program isn't exactly designed to let you retire comfortably just based on collecting from it. Per the Social Security Administration itself:

Social Security was never meant to be the only source of income for people when they retire. Social Security replaces about 40 percent of an average wage earner's income after retiring, and most financial advisors say retirees will need 70 percent or more of pre-retirement earnings to live comfortably. To have a comfortable retirement, Americans need much more than just Social Security.

If you already have a plan to cover the rest of your funding needs, be it a pension, a 401(k), an IRA, or even a traditional brokerage account designated for retirement, you can easily take this news in stride. After all, instead of having Social Security covering 40% of your former income and your other plans covering 30%, the numbers simply get reversed, with you responsible for covering 40% and Social Security 30%.

Your options
In essence, if you're already preparing, you have four choices for what to do now:

  • Do nothing differently. If you have a decent plan in place and are on track to cover 70% of your income assuming a healthy Social Security, you can simply accept that you'll live on 60% instead. If your kids are grown, your mortgage is paid off, your health is decent, and you don't have a huge yearning to travel, you may be able to make it just fine on that 60% level.
  • Work longer. Every year you put in adds to your earnings record, and Social Security uses your highest 35 years of adjusted earnings to compute your benefit. In addition, every year you delay taking Social Security up until age 70 adds to your benefit, potentially making up for the loss from the emptying of the Trust Funds. And let's not forget that more years of work means more years for your other savings and investments to compound on your behalf as well.
  • Save more cash. All else being equal, the more you sock away for your retirement, the more you'll wind up with. Add a bit more to your plan from now on with every paycheck, and 20 years from now, you may well wind up with enough extra in your account to cover for Social Security's shortfall.
  • Invest more aggressively. While more aggressive investing does expose you to more risk, the upside potential is that you may well get higher returns as a result. If you're willing to take on the additional risk, if you're successful, you'd cover the gap without either working longer or socking away more.

Where to invest?
There are countless possibilities for building your retirement portfolio to cover Social Security's gap, depending on your personal risk tolerance, timeline, and need for cash. Here are decent index-style ETFs across various asset types to consider when building your plan:

  • Domestic stocks. The Vanguard Total Market (NYSEMKT: VTI  ) ETF is a one-stop-shop that gives you access to around 99.5% by market cap of the publicly held U.S. stocks traded on major exchanges. A mere 3% turnover and microscopically low 0.05% expense ratio makes this a low-cost way to invest in the overall stock market.
  • Investment-grade bonds. The iShares iBoxx $Invest Grade Corp Bond   (NYSEMKT: LQD  ) ETF owns nearly $24 billion worth of investment-grade corporate bonds. A small 4% turnover and low 0.15% expense ratio make this a low-cost way to get bond exposure.
  • Real estate. The SPDR Dow Jones REIT (NYSEMKT: RWR  ) ETF has a bit over $2 billion invested in real estate investment trusts, attempting to match the Dow Jones Select REIT index. With a reasonable 7% turnover and a still pretty low 0.25% expense ratio, this is a reasonable way to get real estate exposure without turning yourself into a landlord.
  • Foreign stocks. Vanguard's Total International Stock Index (NASDAQ: VXUS  ) ETF has nearly $90 billion in foreign stocks under its control, owning pieces of more than 6,100 stocks from 45 countries. With a mere 3% turnover and low 0.16% expense ratio, it's one of the lowest-cost ways to get your hands on foreign companies without being an international accounting expert.
  • Inflation-protected government bonds. The iShares Barclays TIPS Bond (NYSEMKT: TIP  ) ETF has around $20 billion invested in U.S. Treasury inflation-protected bonds. With a low expense ratio of 0.2% and a reasonable 10% turnover rate, it's a decent way to get exposure to inflation-protected bonds. Note, though, that the recent auctions for those inflation-protected bonds have led to negative yields, which pretty much guarantees that your investment will lose purchasing power to inflation over time.

What's your plan to cover for Social Security's shortfall?
If you've already built a plan to supplement Social Security to get you through a comfortable retirement, it'll only take some minor adjustments to set you up for success once the Trust Funds empty. Share yours in the comments box below, and you just may inspire someone else to build one, too.

For more retirement investing ideas
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "
3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

Read/Post Comments (18) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 02, 2013, at 10:19 AM, VegasSmitty367 wrote:

    I can guarantee there will never be a lack of funding for SS. Because if it ever did happen, every member of Congress would be hanging from a tree along the Potomac!

  • Report this Comment On June 02, 2013, at 11:12 AM, ChaimGovnov wrote:

    SSI was not designed to be the only source of income back in the day when companies actually provided pensions. Those of us who retire after the pension plan fell from fashion so CEO types can pay themselves obscene checks, we are on our own. Find a job you enjoy, because you will be doing it until you die and they pry your cold dead hands from your Palm Pilot.

  • Report this Comment On June 02, 2013, at 12:55 PM, davesdiving wrote:

    I have been paying into SS since I was 14 (20 years now). If you are telling me that SS will not be there for me when I retire, then I want my money back and I want to be able to stop paying into SS. What is the point of this article? I think the government needs to have a plan too if it now knows that it will be depleted by 2033.....Right now its probably just to print more.

  • Report this Comment On June 02, 2013, at 1:02 PM, Finneganswhacked wrote:

    "As a result, you still have around 20 years to prepare yourself for the day the Trust Funds run out of cash, cutting benefits by an average of 25%. "

    ...unless the cap is raised to at least double what it is now ($113,000 or thereabouts). SS has been a success for 75+ years as one of the key programs initiated by FDR. The GOP has been trying to kill it ever since its inception. What a coup for them if they managed to overturn this most prominent Democrat initiative, regardless of the harm it would do to millions of Americans who pay and have paid into it in good faith that their Government will honor its responsibility.

  • Report this Comment On June 02, 2013, at 1:11 PM, mr091468 wrote:

    All the DC prostitutes have to do to secure SS is to raise the wage base from approx. 104k to 250k. Why won't they do it to help us? They're prostitutes, that's why.

  • Report this Comment On June 02, 2013, at 1:14 PM, racejunkie57 wrote:

    one way to help save ss is stop our government from raiding the funds .

  • Report this Comment On June 02, 2013, at 1:46 PM, inreality01 wrote:

    First off, I shouldn't have to makeup for a failed government program that is taking my money and has been for decades. Secondly, with as many taxes as I have to pay and the cost of living going up, I don't have extra money to invest to makeup for the government's failure.

    We need to dramatically cut government, implement a small flat tax, minimize regulations and maximize individual freedom and economic liberty. Government social programs need reformed and most of them eventually eliminated.

    Social Security is a horrible program. No one would voluntarily invest in such a system where you don't own your account, you have no guarantee that the money will be there because the money you "invest" is spent immediately and you get slightly over a 1% return on your money.

    The problem we have in this nation is government. We have too much and we allow our idiotic politicians to play with our lives and steal from some to give to others.

    I just want to be left alone and that includes keeping your hands off my money.

  • Report this Comment On June 02, 2013, at 3:03 PM, sandyssanders wrote:

    This article is more propaganda to privatize SS.

    FACT: SS is not broke and is in fact fully funded until 2033. SS is YOUR pension plan paid for by YOUR payroll tax deduction. It is not an "entitlement" or "welfare". SS will be fully funded in perpetuity by removing the cap on payroll deductions from the current $110k income limit. Check out "SCRAP THE CAP" by Bernie Sanders.

  • Report this Comment On June 02, 2013, at 3:34 PM, jbsilver wrote:

    Funny I ran across this article today. Only this morning I was thinking about social security. I'll be 62 on the 15th of June but I don't plan to retire from my job just yet. And I keep reading about this so called shortfall. I don't see why after working all my life and contributing to social security for the last 50 years why I have to worry about a shortfall. I have a better plan lets stop giving the money away to individuals who has not made any substantial contribution. They should only be given what is calculated by their contributions. We got a federal welfare system going here for peole who managed to get 65 with little or no input in the system. In my state they get $710 a month in the form of SSI, for doing practically nothing but get old. Those who did make a small contribution get a supplement from SSI that usually adds up to a little more than the standard of $710. I'm not sure where the money comes from for the ones who sat on their hands all of their lives. But I'm sure some of it is from SSA. I earned mine I deserve mine's and I've supported these people in the form of taxes already. Now they tell me there isn't not enough money for me. The math is off. They get Low Income Housing, Free Medical, Food debit cards and all kinds of things I will still have to pay for. Why give them my Social Security too. Give them limited vouchers. I see them in the grocery stores buying Foods I can't afford for trying to save for this uncertain future the government has reaped upon us hard working people. I though I was investing in my retirement. .

  • Report this Comment On June 02, 2013, at 3:44 PM, jbsilver wrote:

    As for sandy sanders, I paid into the pension plan for the last 35 years. And social security for even more. You're talking apples and oranges and it all sounds nuts to me. If I took home what I earned I would have had money to try and invest in something. I don't know how you or your source come up with such an explanation. But if one offsets the other then give me my money back with interest. ALL OF IT

  • Report this Comment On June 02, 2013, at 4:07 PM, John1234trapper wrote:

    What.? How about giving me back the money you have taken out of my paycheck for the last 50 Years.

    I don't recall their was an option not to participate.!

    You guys mishandled it and now you want me to suffer.?

    Your letting the Major Corporations move overseas to avoid paying personnel income taxes and corporate, taxes. and not reinvesting back into America tax base. What's wrong (Greed) we can't support the system with everyone flipping burgers or working at Wally World.

  • Report this Comment On June 02, 2013, at 7:39 PM, neamakri wrote:

    the 25% quoted in the article is correct. (US census figures) before 2010 there were 4 workers per retiree. Sometime after 2010 when baby boomers retire, that will change to 3 workers per retiree. In order to keep the same pay-as-you-go operation alive, each worker must contribute 33% more taxes, or each retiree must accept 25% less money due to the missing worker.

    ALL "fixes" proposed so far are to reduce payments to retirees.

    However, the country of Chili had the same system we do, and it privatized dozens of years ago. We just need to copy their system!

  • Report this Comment On June 02, 2013, at 7:53 PM, Ostrowsr wrote:

    We only had 1 kid. Obvious investments like 401K, pension if you're lucky, broker account, IRA, Annuity will do it. Even with 2 kids it's easy. I lost much from poor investing, risks I would not have taken if I had more kids.

  • Report this Comment On June 02, 2013, at 8:59 PM, catatter60 wrote:

    We keep paying into Social Security and the Government keeps taking it out. They say there will be a shortfall by 2033. Why don't they pay back the two trillion dollars they have taken out of Social Security. If they did that there would not be a short fall at all. The Federal Government is a joke. They keep taking our money from us to pay the low lifes of the welfare system. Its a good system when used correctly, but giving to everyone is not the way to go. I see young people everyday that are on welfare, what the hell is this. Get off you a......s and get a job and maybe then the Government can start paying back the money it stole from Social Security.

  • Report this Comment On June 02, 2013, at 9:02 PM, papernpaste wrote:

    Remember, not only did you and I contribute to Social Security but your employer did, too. It totaled 15% of your income before taxes. If you averaged only $30K over your working life, that's close to $220,500. Read that again. Did you see where the Government paid in one single penny? We are talking about the money you and your employer put in a Government bank to insure you and I that we would have a retirement check from the money we put in, not the Government. Now they are calling the money we put in an entitlement when we reach the age to take it back. If you calculate the future invested value of $4,500 per year (yours & your employer's contribution) at a simple 5% interest (less than what the govt. pays on the money that it borrows), after 49 years of working you'd have $892,919.98.

    If you took out only 3% per year, you'd receive $26,787.60 per year and it would last better than 30 years (until you're 95 if you retire at age 65) and that's with no interest paid on that final amount on deposit! If you bought an annuity and it paid 4% per year, you'd have a lifetime income of $2,976.40 per month.

    Another thing with me.... I have two deceased husbands who died in their 50's, (one was 51 and the other one was 59 before one percent of their social security could be drawn. I worked all my life and am drawing 100% on my own social security). Their S.S. money will never have one cent drawn from what they paid into S.S. all their lives.


    Entitlement my foot, I paid cash for my social security insurance! Just because they borrowed the money for other government spending, doesn't make my benefits some kind of charity or handout!!

    Remember Congressional benefits? --- free healthcare, outrageous retirement packages, 67 paid holidays, three weeks paid vacation, unlimited paid sick days. Now that's welfare, and they have the nerve to call my social security retirement payments entitlements?

    We're "broke" and we can't help our own Seniors, Veterans, Orphans, or Homeless. Yet in the last few months we have provided aid to Haiti, Chile and Turkey. And now Pakistan......home of bin Laden. Literally, BILLIONS of DOLLARS!!! And they can't help our own citizens in New York and New Jersey! They sure rushed to help Katrina victims in 10 days!!!!!

    Our retired seniors living on a 'fixed S.S. income' receive no additional federal aid nor do they get any financial breaks, while our government and religious organizations pour hundreds of billions of $$$ and tons of food to foreign countries!

    They call Social Security and Medicare an entitlement even though most of us have been paying for it all our working lives, and now, when it's time for us to collect, the government is running out of money. Why did the government borrow from it in the first place? It was supposed to be in a locked box, not part of the general fund.

    Sad isn't it?

  • Report this Comment On June 02, 2013, at 9:19 PM, DesertKid wrote:

    So, Mr. Fool, please tell me HOW I can make up for the projected shortfall in SS when my husband lost his job, I have been without health insurance most of my life and up to my ass in debt because of so many chronic health problems. We have had to use what little is in our IRA to survive because the $960 a month unemployment won't begin to pay for medicine, doctors, chemo treatments, etc., there are no jobs on the horizon, and the unemployment will run out in 4 months. Social Security will be our ONLY source of income, and my husband has to file at 62 because we need an income. It's easy to say to do all the things as you did, but not everyone has the luxury of good health, a good job, and not being disabled. Oh, BTW, I get $99.00 a month disability from SS......try living on that! Won't even buy one of my medicines--and the drug companies lie when they say they will help. I've asked!!! Ya, I'm bitter and pissed off.

  • Report this Comment On June 03, 2013, at 1:07 AM, Panth wrote:

    Finneganswhacked, SS was a good program, as long as the numbers paying in exceeded that going out, but as the ratio of workers to retirees dropped, the amount going out started to exceed the amount coming in. This is, by definition, a Ponzi scheme. FDR knew it when he started it. Do not blame the GOP for a poor plan.

    Even raising the income cap will not cover the shortfalls, it would only provide a few extra years. If we raise this cap, would those paying in even more be able to collect even more? If not, in addition to being a Ponzi scheme, it is another welfare program (more so than it already is).

  • Report this Comment On June 03, 2013, at 8:07 AM, dwg1950 wrote:

    I would say if congress lets us down on SS in twenty years--then indeed, they should be executed as this is a total embezzlement of the American people. They have proved time after time they are a bigger danger to my kids, your kids, my grandchildren, your grandchildren than the Taliban or Al Quida could ever be to this country--they need to be stopped--their only concern is re-election and taking care of themselves--this self serving purpose for their existence needs to be stopped before it is too late. I love my country but they are the enemy. They need to be held accountable--no more better retirement program than we have and no more better benefits than we have/ they are totally undeserving.

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