The rumor mill tends to be bustling when it comes to Social Security. And one big myth you'll hear a lot is that the program is on the verge of going away.
Thankfully, that's just not true. Social Security is facing some financial challenges that lawmakers desperately need to address, and soon. If they don't, benefit cuts could be on the table.
But if even Social Security is forced to slash benefits, it plans to continue paying those benefits nonetheless. And that's a good thing.
Still, it's a good idea to tell yourself that Social Security is disappearing -- even if that's far from the truth.
Image source: Getty Images.
You might need the motivation to save
A big reason some people may not take the idea of retirement savings too seriously is that they expect to fall back on Social Security for their senior income. But that's a mistake you might regret throughout retirement.
First of all, benefit cuts are on the table. So if you're expecting to live mostly on Social Security, and that income stream is then slashed by 20% to 25%, it's apt to leave you in a tough spot.
But benefit cuts aside, Social Security will only replace about 40% of your pre-retirement wages without benefit cuts. Now if you truly think you can live comfortably with a 60% pay cut, then sure, don't fund a retirement plan. But if the idea of having to curb your spending substantially as a senior doesn't sit well with you, then you may want to pretend that Social Security is on the cusp of going away. That might motivate you to start focusing on building up your nest egg.
Now, let's talk about savings. It's true that the longer a window you give yourself, the more opportunity you'll have to grow wealth. But even if you're getting a bit of a later start on savings, you might still have a prime opportunity to build up a nice nest egg.
Let's say you're 50 years old with an anticipated retirement age of 67 and have access to a 401(k) plan at work. That means you have the option to allocate up to $30,000 a year to that account.
Now maybe that's not attainable. But what if you're able to save $1,000 a month over the next 17 years? If you invest that money at an average annual 6% return, which is a fairly conservative one, then you'll end up with over $338,000. That's not a small amount of money.
Better yet, in this example, let's say you stretch your career until age 70, allowing you to save and invest $1,000 a month for an extra three years. At that point, you'll be looking at more than $441,000 in savings, assuming that same 6% return.
Social Security is not disappearing on us. But if you tell yourself that it is, it may light a fire under you to get serious about building independent savings. And your nest egg might end up spelling the difference between being able to enjoy a comfortable retirement versus constantly pinching pennies and being afraid to spend.
