You may have heard that Social Security is running out of money and is on the verge of going broke. Thankfully, that's not at all true.
Workers today should not worry about getting no Social Security income once they retire. And current beneficiaries can expect to continue getting monthly payments. But while Social Security isn't going bankrupt, the program may have to cut benefits if lawmakers don't come up with a way to address its impending revenue shortfall.
Social Security gets most of its revenue from payroll taxes -- the ones most of us grumble about paying. But in the coming years, so many baby boomers are expected to leave the workforce, and that mass exodus will leave Social Security with a lot less revenue to work with. Meanwhile, those same boomers are apt to start drawing their own benefits, creating a real financial crunch for Social Security.
Now the program does have trust funds it can dip into to keep up with scheduled benefits -- but only to a point. Those trust funds are expected to run out of money by 2034, and once that happens, benefit cuts may be inevitable.
If you're worried about collecting a lower benefit during retirement, there are steps you can take to get ahead of the problem. Here are some important ones worth considering.
1. Beef up your nest egg
The more money you're able to put into an IRA or 401(k) plan, the less impacted you'll be by Social Security cuts. If you're currently only contributing, say, $300 a month to your savings, aim to cut back on some spending and ramp your contributions up to $400 or $500 a month.
If you manage to sock away $500 on a monthly basis over 30 years, you'll end up with about $680,000, provided your IRA or 401(k) generates an average annual 8% return. That return is a bit below the stock market's average, so it's a reasonable one to work with if you go heavy on stocks.
2. Save in a Roth IRA or 401(k)
The money you save in your retirement plan won't necessarily all be yours to keep. If you fund a traditional IRA or 401(k), your withdrawals will be taxable during retirement, which means you'll have less money available to compensate for lower Social Security benefits.
On the other hand, if you save in a Roth IRA or 401(k), withdrawals will available to you on a tax-free basis during retirement. That means you'll get more flexibility with your savings and won't have to pay the IRS at a time when you may be grappling with less Social Security income.
3. Plan to work part-time
Many people aim to retire and stop working completely. But you may need to bring home some sort of paycheck to compensate for lower Social Security benefits.
The good news, though, is that seniors today have more options than ever for earning money. Thanks to the booming gig economy, you can boost your retirement income by driving for a ride-hailing service, selling baked goods or crafts, or being an online math tutor. The choices are virtually endless.
While Social Security is not in danger of going away completely, benefit cuts are a real possibility. Take steps to protect yourself in the face of a lower retirement benefit so you're not thrown for a financial loop once retirement rolls around.