Millions of seniors today get a lot of their retirement income from Social Security. But if that's your plan for the future, it may not be a great one.
Social Security is facing a financial crunch in the coming years as baby boomers exit the workforce in droves, thereby denying the program a lot of the payroll tax revenue it depends on to stay afloat. Now Social Security does have trust funds it can tap to keep up with scheduled benefits even as its revenue shrinks. But once those trust funds run out of money, benefit cuts will be a strong possibility.
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Now there are two things you should know about Social Security cuts. First, they might happen as early as 2034. That's when the program's Trustees expect its trust funds to be out of money.
Secondly, benefit cuts could amount to 20% of what Social Security is supposed to be paying out. That's a pretty significant hit. And so if you're counting on Social Security to help fund your retirement in a meaningful way, you may want to rethink your plans. And you may want to increase your savings rate as soon as possible.
Don't fall back on Social Security too much
The good thing about Social Security's financial crisis is that it's not extreme enough to put the program in danger of going away. A 20% cut in benefits isn't ideal, but it's also not nearly as terrible as the idea of there not being benefits to go around at all.
But still, even without benefit cuts, Social Security will only replace about 40% of the average worker's pre-retirement income. Most seniors need a lot more money than that to keep up with their expenses and actually get to enjoy retirement. So if you don't want to struggle financially in light of potential Social Security cuts, you'll need to make an effort to build yourself a solid nest egg.
Now the more time you have to do so, the less pressure it puts on you, because if retirement is decades away, you can build a lot of savings via modest monthly contributions. If you have 35 years until you're set to end up your career, you could conceivably get away with socking away just $300 a month in a 401(k) or IRA. If you were to invest your savings during that time at an average annual 8% return, which is a bit below the stock market's average, you'd end up with $620,000.
Clearly, if you're closer to retirement and want that sort of nest egg, you'll need to part with more money on a monthly basis. The point, however, is that Social Security cuts may soon become a reality. If you do your best to save more for retirement in light of that, those cuts may not upend your plans to such an extreme degree, if at all. But if you don't start ramping up your retirement plan contributions, you might end up cash-strapped and overwhelmingly unhappy once your career comes to a close.
