You may have heard that Social Security is running out of money and won't be around in the near future. The good news is that that's not true.
Social Security may be looking at a financial shortfall, but it's not at risk of disappearing completely. It is, however, at risk of benefit cuts.
In the coming years, Social Security expects to owe more in benefits than it collects in revenue. The reason is that the program's primary revenue source is payroll taxes. But as baby boomers rapidly leave the workforce and start filing for benefits, Social Security will experience a cash crunch. And while it can tap its trust funds for a while to keep up with scheduled benefits, once those cash reserves run dry, benefit cuts will be on the table.
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Meanwhile, the latest estimates say that Social Security's trust funds will be out of money in a little more than a decade. So the issue of benefit cuts isn't a far-off problem -- it's a relatively near-term one.
Now if you're nowhere close to retirement age, you might assume that you don't have to concern yourself with Social Security's financial issues. After all, that's a problem for your future self. But the sooner you recognize the impact benefit cuts might have on your retirement, the sooner you can take steps to make up for that -- and avoid financial problems down the line.
Start saving now
These days, Social Security will generally replace around 40% of the average person's pre-retirement income. But most seniors need about twice that much income to live in a comfortable manner.
Now let's talk benefit cuts. Once Social Security's trust funds run dry, benefits could be slashed to the tune of 20% or more. That means they'll provide even less replacement income. And it also means that you should make every effort to boost your retirement savings now -- so you're able to rely more on your nest egg and less so on Social Security.
Of course, saving for retirement may not be your top priority if that stage of life is decades away. But actually, in that case, now's the perfect time to start saving, namely because you'll be giving your money decades to grow. And that means you won't have to part with a lot of money on a monthly basis to accumulate a giant nest egg.
Say you're 25, and retirement is 40 years away as far as you're concerned. If you sock away $300 a month in an IRA or 401(k) plan and invest that money at an average annual 8% return, which is below the stock market's average, you'll end up with about $933,000. That could make Social Security cuts a lot less stressful for you.
But watch what happens when you don't first start saving for retirement until age 45. If you want to end up with $933,000, or something in that ballpark, you'll need to be willing to part with $1,700 a month to make that possible, assuming that same 8% return. That's a really tough ask. And it's also why you're better off building your nest egg from a young age.
Don't bank on Social Security
Social Security isn't going away, but that doesn't mean you can count on it to give you a financially stable retirement. The sooner you recognize that and start saving, the less likely you'll be to encounter financial stress as a senior.
