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Average Americans Would Need an Extra $145,650 to Adjust for Social Security Cuts

By Christy Bieber – Sep 19, 2020 at 7:31AM

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Will you be ready?

In 2035, Social Security's trust fund is scheduled to run dry, necessitating a 24% automatic cut to benefits as payroll tax revenue will be enough to pay only 76% of the promised amount. For a typical retired worker who would likely be slated to receive around $2,022 in monthly benefits at the time, this would mean a loss of about $485 per month or $5,826 annually. 

Losing that much money from Social Security benefits would be a big hit -- and future retirees need to save a substantial sum to make up for the missed income.

Senior couple looking at paperwork with financial advisor.

Image source: Getty Images.

Your nest egg may need to be at least $145,650 bigger

Most retirees get their income from Social Security and investments. If your Social Security benefits fall but you want to maintain the same standard of living, you'll need your retirement investment accounts to produce more.

Of course, you need to be careful because you don't want to take too much out of your investment accounts and end up running short. Since you'll need your investments to produce enough to offset the loss of Social Security benefits, a bigger account balance will be required so you can withdraw more from the account without worrying about it running dry.

How much bigger? If you follow the 4% rule, you'd need an extra $145,650 in your investment account to produce the $5,826 that you'd need to make up for your lost Social Security benefits. The 4% rule enables you to withdraw 4% of your retirement account balance the first year and then increase withdrawals each year based on inflation. 

Of course, if your Social Security benefit is larger, you'd also need more money to be ready for the benefit cut since your benefits will decline by a bigger dollar amount. You can determine the amount of necessary additional money by signing into your online Social Security account, estimating your benefit, then figuring out how much a 24% reduction would cost you. Then, just multiply that amount by 25.  So if you'll see $6,000 less in annual Social Security benefits due to a 24% cut, you'd need your retirement nest egg to be $150,000 bigger.

Saving for the future is more important than ever

If you're still working, you have time to increase the amount you're investing so you can bulk up your nest egg to prepare for the possibility of Social Security benefit cuts. 

By investing more money throughout your career, you can save the extra $145,650 needed to produce the money you'll lose if you'd receive the average Social Security benefit. But if you're currently retired, coping with such a substantial benefits cut could be a major financial hardship. It's best to prepare for it now by keeping your withdrawal rate low to preserve your savings and ensuring you're exposed to the right level of risk in your portfolio. 

Even if lawmakers do act to stave off the large automatic benefits cut slated to happen in 2035, most of the solutions that would solve Social Security's funding crisis could also involve a cut to benefits -- either across the board or for some beneficiaries. That means everyone, including current and future retirees, needs to be ready to see smaller benefits. By planning for this now, you can avoid a financial crisis in the future. 

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