Recently, the Social Security Trustees released an update on the state of the program's finances, and the news wasn't as positive as it could've been. Before the pandemic began, the Trustees estimated that Social Security's combined trust funds would run out of money by 2035, at which point benefit cuts would be on the table.
That timeline has since been moved up. Now, the Trustees are saying that because of widespread unemployment during the pandemic, Social Security's trust funds will be depleted by 2034. And once that happens, seniors may be looking at a 22% benefit cut.
For current retirees who are very reliant on Social Security, that's extremely frightening and problematic. But if you're not yet retired, here's why you don't need to panic over a reduction in benefits.
Carve out your own safety net
Many retirees rely heavily on Social Security to make ends meet. But now that you have a heads up that benefits may be cut in the not-so-distant future, you can take the opportunity to compensate.
If you immediately begin funding an IRA or 401(k) plan, and you invest your savings wisely, you might grow yourself a nice balance so that by the time you leave the workforce, you don't have to worry about what Social Security will pay you. Instead, you'll have your own nest egg to fall back on.
Imagine you're able to sock away $500 a month in a dedicated retirement plan over the next 25 years. Let's also assume you invest your savings heavily in stocks.
There's a good chance your IRA or 401(k) will enjoy an average annual 8% return, which is a bit below the stock market's average. And in that case, you'll be looking at a nest egg worth about $439,000.
Now, let's assume you have 30 years until you're set to retire, not just 25. If you contribute $500 a month to savings and score an average yearly 8% return, you'll end up with an even more impressive $680,000.
Of course, if you're already retired, you can't go back in time and boost your savings. But in that case, there are steps you can take to make up for a potential reduction in your Social Security income.
For one thing, look at cutting back on spending. That could mean downsizing to a smaller house or relocating to a city that's less expensive to call home.
Next, see about working in some capacity. These days, getting a part-time job doesn't have to mean standing on your feet for hours at a time stocking shelves or operating a cash register. You can start your own business or find a flexible gig that works for you.
Don't lose sleep over Social Security
The idea of losing out on any amount of Social Security income can be disturbing. But remember, having your benefits cut is far better than having them disappear completely. Thankfully, that scenario is not on the table, despite the financial troubles Social Security is facing.
Furthermore, though benefit cuts are a strong possibility, they're not set in stone. Lawmakers may make changes to Social Security that allow the program to keep paying benefits at their scheduled level.
But even if benefits are reduced in a little over a decade's time, there are steps you can take to make up for that loss of income. And now that you know that benefit cuts are possible, you can get ahead of that scenario before it actually becomes reality.