Raise your hand if you're planning on relying on Social Security benefits during retirement. If so, you'll likely be among the 50% of married retirees (or 71% of unmarried retirees) whose Social Security benefits make up at least half of their income during retirement. Even scarier is the fact that 23% and 43% of married and unmarried retirees, respectively, count on Social Security for at least 90% of their income.
Now, it's not necessarily a bad thing to rely on Social Security. In fact, the Social Security Administration suggests that people plan for their benefits to replace up to 40% of their income during retirement.
The problem arises when you depend too much on Social Security -- and that problem could get worse in the not-too-distant future.
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Social insecurity
For years, people have voiced concerns that Social Security is on shaky ground, and 78% of Americans worry that Social Security will run out during their lifetime, according to a recent survey by Nationwide.
While Social Security won't actually run dry -- after all, it's funded by taxpayers -- there's a possibility that benefits will be cut in the next few decades.
According to the Social Security Board of Trustees report, by 2034, the $2.85 trillion that was left in asset reserves at the end of 2016 will be gone. This is partly because baby boomers are retiring in droves, and although younger workers are still contributing to the program through payroll taxes, there will be more money flowing out of the system than into it. Life expectancy plays a part as well, with the average 65-year-old expecting to live an additional 20 years.
What does all this mean? It means that although benefits won't disappear completely, they may be cut by up to 23%.
Before you panic, keep in mind that it's very likely Congress will come up with a solution before anything drastic happens. But even so, it's a good idea to have a backup plan just in case the government doesn't pull through.
Hope for the best -- prepare for the worst
Even though it's unlikely Social Security will see significant cuts, it's still smart to build up your retirement fund enough so that you won't be depending on your benefits just to make ends meet.
One way to plan around potential cuts is to work a few years longer than you may have planned. While you can start receiving benefits at age 62, they'll be reduced compared to if you had waited until your full retirement age (which is 67 for anyone born in 1960 or later). And if you wait until age 70, you'll receive a bonus along with 100% of your earned benefits.
Say your full retirement age is 67. If you were to retire at age 62, your benefits will be reduced by about 30%. Retire at 65, and you'll see a reduction of about 13%. If you were to wait until 70, though, you'd earn a bonus of about 24% on top of your full benefits. So even if benefits are cut by 23%, you've got a cushion to fall back on.
Another option is to create a withdrawal plan before you retire. The rule of thumb is to withdraw 4% of your savings the first year you retire, then adjust that percentage each following year based on inflation. While the 4% rule shines in its simplicity, you may still need to tailor your withdrawal plan to fit your savings.
Calculate how long your retirement savings will last without including your Social Security benefits in the mix to see whether what you have (or hope to have by the time you retire) will be enough to get by in the event that there are cuts. From there, you can create a withdrawal plan to determine how much you can comfortably withdraw each year to cover your costs. Then if you do receive Social Security benefits (even if it's less than what you'd hoped for), that money will just be icing on the cake.
Retirement planning is hard enough as it is, but when you have to worry about whether you'll receive as much in Social Security benefits as you'd hoped for, it gets even tougher. The good news is that while a slash in benefits is possible in the next few decades, unless Congress can't figure out a solution, it's not too likely. But that doesn't mean you can't be prepared.
