Social Security benefits are an integral source of income for many retirees, with nearly a quarter of married couples depending on them for at least 90% of their retirement income, according to the Social Security Administration (SSA).
But the program has been experiencing some financial difficulties in recent years, and the problem could get worse. Those who are already retired or are nearing retirement could see their benefits slashed or even eliminated in the relatively near future, so it's crucial to take action now to prepare your retirement fund.
Exchange-traded funds (ETFs) are a smart investment for several reasons. And if you're worried about Social Security, they can be invaluable in helping save more for retirement.
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What does the future hold for Social Security?
The SSA depends primarily on payroll taxes to fund benefits, but right now it's facing a cash shortage. The money coming in from payroll taxes isn't enough to fully fund retirees' monthly checks, so the SSA has tapped its trust funds to cover the deficit.
But those trust funds won't last much longer; a recent report from the Congressional Budget Office estimates they'll be depleted as early as 2031. At that point, unless Congress steps in with a solution, benefits could be cut by about 25%.
Another wrench in Social Security's plans is President Trump's proposal to eliminate payroll taxes. Because they are Social Security's main source of income, eliminating them could devastate the program. In fact, the SSA estimates that if payroll taxes are eliminated starting in early 2021, its trust funds will be depleted by mid-2023. Without the trust funds or money from payroll taxes, Social Security could potentially disappear unless Congress comes up with an alternate source of income.
How ETFs can help
Whether or not Social Security benefits are reduced or eliminated, you can boost your retirement savings to reduce your dependence on your monthly checks.
ETFs are essentially large collections of stocks, bonds, or other securities. Some of them track stock market indexes, such as the S&P 500 or Dow Jones Industrial Average, while others only contain stocks from certain industries, such as tech, energy, or real estate.
Investing in ETFs can be smart for a couple of reasons. For one, they provide immediate diversification, which can reduce your risk when investing. Because you're investing in dozens, hundreds, or even thousands of stocks with an ETF, you're less likely to see your portfolio take a hit if a few of them don't perform well.
Additionally, index ETFs in particular can help your savings bounce back from market crashes. They are designed to follow the market, which has historically always recovered from its downturns. That means even if the market takes a turn for the worse, it will bounce back -- as will your index ETFs.
Even when the stock market is volatile, ETFs can be a safe bet. As seen in the above chart, three popular S&P 500 ETFs all took a tumble in March when the market as a whole plummeted. But all three managed to bounce back as the market recovered, which can be reassuring when you're trying to supercharge your retirement savings.
ETFs are a lower-risk investment that can help you build wealth over the long term, making them a fantastic choice to save for retirement. By maximizing your savings, you'll improve your chances of retiring comfortably no matter what happens to Social Security.
