If you didn't catch the news that came out recently about Social Security, here's an update. And it's unfortunately not a good one.
The Social Security Trustees reported that the program's combined trust funds are set to run dry in 2034. That's a year earlier than the trustees projected last year. And it means that Social Security could be one year closer to benefit cuts.
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The trustees also said that once Social Security's combined trust funds are emptied, the program will only be able to pay 81% of scheduled benefits. That's not a good thing at all for retirees.
As it is, Social Security replaces only about 40% of an average earner's pre-retirement wages. A 19% cut on top of that could leave countless seniors with inadequate funds to cover their expenses.
For this reason, it's important that everyone do what they can to prepare for Social Security cuts. Here's how to do that, depending on your current situation.
If you're still working
If you're still working and, better yet, have a good number of years in the labor force ahead of you, you're perhaps not in such a bad place as far as Social Security goes. It's true that you may not get the complete benefits you're entitled to if cuts happen. But you also have many years to save so you can make up for reduced benefits.
Let's say you're 32 years old and plan to retire at 67. Even if you haven't started building a retirement nest egg yet, you have a solid 35 years to accumulate savings. Fund a 401(k) or IRA with $500 a month starting now, and in 35 years, you could be sitting on about $1.034 million if your portfolio gives you a yearly 8% return, which is a few percentage points below the stock market's average.
Even if you're older and don't have a 35-year savings window, you can still build up decent savings by prioritizing your nest egg in the coming years. Saving $500 a month over 15 years at an 8% return leaves you with $163,000, which could help make up for benefit cuts. And if you're able to save at a higher rate each month, you could end up with a much larger nest egg by the time retirement kicks off.
If you're already retired
Don't panic over Social Security cuts if you're already retired. You may have a few options for bettering your financial situation.
First, you can see about getting a part-time job to boost your income. And if you don't like the idea of a set schedule, you could turn to the gig economy.
You can also look at your spending and aim to shed expenses. If you own your home outright, for example, and it's worth $500,000, downsizing could make it possible to buy a replacement home for half that cost, allowing you to pocket the rest.
You can also think about relocating to a part of the country where your Social Security benefits might give you more buying power. And if it's feasible, you could see if it makes sense to live in a multigenerational household with your grown kids and grandkids instead of on your own. There could be cost savings for everyone involved, plus the perk of being there for your family's milestones.
Social Security cuts aren't set in stone. But at this point, everyone needs to plan for them. The sooner you do, the less of a blow they might deal to your retirement finances.
