A new report from the Social Security Administration Board of Trustees shows that benefit cuts could be looming in the relatively near future.
In recent years, the money coming in from workers' payroll taxes hasn't been enough to completely cover retirees' benefits. As a result, the Social Security Administration has had to tap its trust funds to cover the deficit.
However, according to the most recent estimates, those trust funds are expected to run dry by 2034. At that point, payroll taxes will only cover around 77% of projected benefits, meaning your monthly checks could be cut by up to 23% by 2034.
To be clear, nobody knows for certain whether these cuts will happen, as lawmakers could come up with a solution before 2034. But it's wise to be ready just in case. Here are a few steps you can take to prepare for potential cuts.
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1. Increase your savings rate
The more you have in personal savings, the less you'll need to rely on Social Security. If benefits are cut, then it won't have a drastic effect on your monthly retirement income.
Saving even a little more each month can go a long way, too. Boosting your savings by just $100 per month can add up to nearly $55,000 after 20 years, for example, assuming you're earning a modest 8% average annual return on your investments.
Considering that the average retiree collects roughly $20,000 per year in benefits, those extra savings could replace more than two full years of Social Security.
2. Reduce your retirement expenses
Not everyone can afford to save more, especially if money is already tight. Another option, then, is to consider reducing your future expenses as much as possible.
This could involve drastic life changes (such as moving to a more affordable city or state) or small adjustments (like revamping your budget and cutting any unnecessary costs).
Depending on how close you are to retirement, it may be tough to know how much you'll spend. But by estimating these costs now and determining which ones you can potentially live without, you'll be better prepared if Social Security is cut in the future.
3. Delay claiming benefits
The age you file for Social Security will have a considerable effect on the amount you receive. By delaying benefits a few years, you could boost your payments by hundreds of dollars per month.
Say, for example, you have a full retirement age (FRA) of 67 years old, and by filing at that age, you'd receive $1,600 per month (which is roughly the average benefit amount among retirees).
If you were to begin claiming at age 62, your benefit amount would be permanently reduced by 30%, leaving you with $1,120 per month. But if you were to wait until age 70 to file, you'd receive a 24% bonus in addition to your full benefit amount, or $1,984 per month. That's a difference of $864 per month.
If benefits are reduced in the future, the extra money you'll receive by delaying Social Security can go a long way. While this strategy isn't right for everyone, it is one of the most effective ways to increase the size of your monthly checks.
Making the most of Social Security
It's uncertain whether Social Security benefits will actually face cuts in the future, but it's smart to start preparing anyway. If benefits aren't cut, you'll simply have some extra cash for your senior years. But if they are reduced, taking steps now could result in a more comfortable and financially secure retirement.
