Millions of retired seniors count on Social Security to pay the bills, but the program is facing some serious financial challenges that could compromise its ability to keep up with scheduled benefits in the future. Once Social Security's trust funds run out, which is expected to happen in 2035 as per the latest Trustees Report, recipients could see as much as a 20% reduction in their monthly benefits. That sort of hit could be catastrophic for seniors who rely on those payments as their primary source of retirement income.
Clearly, something has to be done to address Social Security's impending shortfall, and that's one thing most Americans are in agreement on, according to the latest Aegon Retirement Readiness Survey. Specifically, 32% think the government should increase funding for Social Security, while 21% think the program's money problems can be addressed by reducing benefits while simultaneously raising taxes. Meanwhile, only 8% of Americans feel that the government should sit back and do nothing.
Of course, there's a host of ideas out there designed to address Social Security's financial crisis and improve its outlook. And if you've been following political news at all, you're probably aware that several presidential candidates have their own proposals to remediate the program. But because all of these solutions are hypothetical at this stage of the game, it's best to prepare for the possibility that Social Security may not have the funding on hand to keep up with scheduled benefits in the future -- and save enough to compensate for that fact.
Hope for the best, plan for the worst
Let's be clear: Social Security is in no danger of completely going bankrupt. The worst-case scenario recipients are looking at is a reduction in benefits, the extent of which may become more evident over time. (The 20% referenced above is by no means set in stone.) Still, it's important to plan for that benefits cut to avoid winding up cash-strapped during retirement, and saving independently is the best way to get there.
Currently, workers under 50 can contribute up to $19,000 a year to a 401(k), and up to $6,000 to an IRA. Those 50 and over get a catch-up allowance that increases these limits to $25,000 and $7,000, respectively.
Now many people can't max out a 401(k), and might struggle to hit the maximum yearly contribution for an IRA. But if you start saving some amount of money on a consistent basis right now, and work on increasing your contributions over time, there's a good chance you'll accumulate enough savings to make up for the income shortfall a reduction in Social Security would leave you with.
Imagine, in fact, that you were to contribute $300 a month to a retirement plan over a 30-year period. If you were to invest that money at an average annual 7% return, which is a reasonable assumption when dealing with a stock-focused portfolio, you'd end up with $340,000. Make it $400 a month, and you're looking at $453,000. Neither is a small amount of money, and some lifestyle changes during your working years could make either target possible.
Of course, it's too soon to tell what the future will hold for Social Security. Lawmakers are certainly invested in addressing the program's financial woes, so there's no reason for today's workers to lose hope. It may very well be the case that benefits don't get cut in the future, but in the absence of a crystal ball, saving independently is the best way to secure a financially sound retirement.