There are a lot of rumors flying around about Social Security's finances -- and not all of them are true.
The idea that the program is going broke, for example, is a big misconception. Social Security can't go broke, due to the fact that it's funded by payroll taxes. So as long as there's an active labor network, Social Security gets to receive revenue.
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However, Social Security is facing a major revenue shortfall as baby boomers exit the workforce in droves in the coming years. The program is expected to have to rely on its trust funds to keep up with scheduled benefits until that money runs out.
Once Social Security's trust funds are emptied, benefit cuts may be unavoidable. That's something everyone needs to prepare for.
How bad might benefit cuts get?
It may be a bit premature to predict exactly how much benefits will shrink if Social Security were to implement cuts. There's still about a 10-year period until the program's trust funds are set to be depleted, and revenue projections could change during that time.
As of now, though, Social Security recipients may be looking at about a 21% reduction to their monthly benefits. That percentage could change for better or worse. But it's a number people should keep in mind in the course of retirement planning.
Don't let Social Security cuts wreck your retirement
A 21% reduction to your Social Security benefits, or something in that vicinity, could have a negative effect on your retirement finances. But if you make a commitment to save for retirement, you might manage to accumulate $1 million by the time your career comes to an end.
Start by funding your 401(k) or IRA from a young age -- if not at the time of your first paycheck, then at least during your 20s. Next, make a point to invest your retirement savings in the stock market, whether by adding different stocks to an IRA or choosing something like an S&P 500 index fund for your 401(k). Finally, do this consistently over many years, sit back, and wait for your money to grow.
Let's say you start contributing toward retirement at age 22 and you retire at 67, which is full retirement age for Social Security if you were born in 1960 or later. If you put $220 a month into a retirement account and your investments give you an 8% yearly return, which is a bit below the stock market's average, you'll end up with just over $1 million.
If you don't manage to start saving at such a young age, you'll have to contribute more money each month to reach that same number. The point, however, is that it can be done without parting with half of your salary or being a ridiculously high earner.
Social Security's future is still unknown, and benefit cuts are not guaranteed to happen. But it's important to have a means of supplementing your benefits nicely in case they do. Saving and investing consistently could be your ticket to retiring without financial worries.
