If you've worried that Social Security won't be there for you in the future, you're not alone. In a recent Gallup poll, adults of all ages expressed concerns over the program's long-term viability. Specifically, 51% of pre-retirees aged 50 to 64, 49% of workers aged 30 to 49, and 33% of millennials aged 18 to 29 all say they're nervous about their benefits.
Clearly, these aren't small percentages, and the fears associated with them are by no means unfounded. Social Security is facing a multi-trillion-dollar shortfall that, if left unaddressed, could result in some serious cuts to benefits down the line.
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However, let's be clear: In a worst-case scenario, as per the latest projections, future recipients might only collect 77% of the scheduled benefits they'd otherwise be entitled to. But that's a far cry from not getting benefits at all, which is what many of today's workers are led to believe.
So let's dispel that myth: Social Security can never go broke because it's funded by payroll taxes. As long as there's an active workforce, the program can sustain benefits to some degree. Still, it's wise to be cautious about relying on Social Security in retirement -- not only because the program's future is uncertain, but because historically, Social Security has done a poor job of keeping up with inflation. And the sooner more workers take steps to avoid having to depend on those benefits down the line, the better they'll be able to sleep at night.
Securing your own retirement
A big reason why so many seniors wind up cash-strapped is that they think Social Security will cover their living expenses on its own. It won't.
At present, those monthly benefits will replace roughly 40% of the typical worker's pre-retirement income. Most folks, however, need more like 80% of their previous earnings to stay afloat financially in retirement, especially when you factor in expenses like healthcare. Therefore, future cuts or not, relying on Social Security in the absence of independent savings is poor, misguided planning. If you're serious about retiring with a modicum of comfort, you'll need to take steps to build your own nest egg.
Now here's the good news: If you still have a number of working years ahead of you, you can accumulate a decent amount of savings without having to give up too much of the lifestyle you've come to enjoy. As long as you invest your savings wisely, you can contribute a modest sum each month and have it grow into something bigger.
How big are we talking? Imagine you're able to sock away $400 a month, which isn't an unreasonable figure. Let's also assume your investments manage to generate an average annual 7% return, which is more than doable with a stock-focused strategy. Here's how much you stand to accumulate based on your total savings window:
|
If You Start Saving $400 a Month at Age: |
Here's What You'll Have by Age 65 (Assumes a 7% Average Annual Return): |
|---|---|
|
25 |
$958,000 |
|
30 |
$663,000 |
|
35 |
$453,000 |
|
40 |
$303,000 |
|
45 |
$197,000 |
|
50 |
$120,000 |
|
55 |
$66,000 |
Table and calculations by author.
Notice how much less impressive those numbers get as you work your way down from a 40-year savings window to one that's just five, 10, or even 15 years long? The fact of the matter is that if you start putting money away early enough, it doesn't have to impede your lifestyle too heavily. But if you wait until you're older to start saving, you'll need to do one of two things: resign yourself to having less income as a senior or save more each month to catch up.
Speaking of catching up, workers 50 and older are allowed to put up to $24,500 into a 401(k) each year and $6,500 into an IRA. These limits are significantly higher than the thresholds for workers under 50, which are $18,500 and $5,500, respectively. This means that if you're 55 with little to no savings, you'll want to max out that 401(k) immediately. But if you do so over a period of 10 years, you'll have $338,000 to work with as a senior, assuming that same 7% average annual return.
No matter how much you ultimately manage to save, the point is to take retirement into your own hands and stop assuming Social Security will pay for your golden years by itself. Even without future cuts, the program won't even come close, and the sooner you realize that, the better.
