Social Security serves as a key income source for millions of seniors, and for many, those benefits constitute their sole source of income. That's problematic, though, because seniors on Social Security have been losing buying power for years. Also, the reality is that those benefits were never supposed to sustain retirees by themselves in the first place.
For average earners, Social Security will replace 40% of preretirement wages. Most seniors need a lot more income than that to maintain a comfortable lifestyle and cover essential expenses.
But what makes matters even worse is the fact that Social Security recipients may be looking at substantial benefit cuts in a little over 10 years' time. In its latest report, the program's Trustees project that Social Security's trust funds will run out of money by 2035. Once that happens, benefits could be slashed to the tune of 20%.
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Clearly, that's an unsettling scenario for anyone who's counting on Social Security to serve as a solid income source for retirement. But the good news is that there's an easy way to compensate for benefit cuts -- and make sure they don't destroy you being able to afford your senior years.
Save enough to make up for benefit cuts
Losing 20% of your monthly Social Security benefits could put a damper on your retirement plans. But if you go into retirement with a solid nest egg, you may not have to worry so much about your benefits shrinking.
Now it's easy to assume that a large nest egg is something you'll never manage to attain. This especially holds true if you're an average earner and the bulk of your income goes toward everyday living costs like food and housing. But if you give yourself a long enough savings window, it might happen.
Say you're able to sock away $300 a month in an IRA or 401(k) plan over a 40-year period. If you invest heavily in stocks (which you should), your savings might generate an average annual 8% return, as that's a few percentage points below the market's average. And in that case, you'll be sitting on a nest egg worth about $933,000. Push yourself to save $400 a month, and you'll be looking at a cool $1.24 million.
If you're older and are closer to retirement age, you may need to be willing to part with more money on a regular basis if you want to grow a sizable nest egg to make up for lower Social Security benefits down the line. But even so, imagine retirement is 20 years away. If you save $500 a month between now and then and generate an average yearly 8% return in your retirement plan, you'll end up with about $275,000. Save $600 a month, and you'll have $329,000.
Create your own backup plan
We can't say with certainty that Social Security will end up slashing benefits because lawmakers might manage to come up with a way to prevent that from happening. And it's in their best interest to maintain benefits at their scheduled level, because otherwise, a poverty crisis among seniors could easily ensue.
But benefit cuts are a possibility everyone should prepare for. And if you make an effort to build yourself a strong nest egg, you might manage to move forward with all of your retirement plans even if Social Security ends up paying you a lot less.
