There are many older Americans today who get a lot of their income from Social Security. And once you retire, you may end up in a position where you need those benefits to cover your expenses.
It's for this reason that the idea of Social Security cuts is so scary. And unfortunately, it's not just a rumor.
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In the coming years, Social Security is anticipating a revenue shortfall as baby boomers exit the labor force in droves. While younger workers should be entering the labor force to help compensate, the rate of replacement workers is not expected to match the level of people exiting.
That's a problem for Social Security, since it gets the bulk of its revenue from payroll taxes. If that revenue stream shrinks at a time when baby boomers also start claiming the benefits they've earned, it's going to put a huge strain on the system.
The Social Security Trustees were very clear in their summary of the program's finances earlier this year. They said point blank that Social Security's combined trust funds, which the program can use to supplement payroll tax revenue, are set to run dry by 2034. At that point, the Trustees only expect 81% of benefits to be payable.
This means that current retirees could be looking at a major pay cut. And future retirees may not end up getting all of the benefits they should.
If you're in the latter category, though, you have a prime opportunity to prepare for Social Security cuts. Here are some things worth doing.
1. Boost your savings
It's not an easy thing to save for retirement, especially when living costs are up broadly and you have many near-term expenses. But if you're able to eke out just a bit more money for your IRA or 401(k) plan, you can set yourself up with another robust income stream for your senior years.
Let's say you're 40 with $60,000 saved for retirement so far, and you've been contributing $200 a month to an IRA or 401(k). If you're able to boost your monthly contribution to $300, and you can save that amount every month until age 65, you could be sitting on $674,000.
That number does assume an 8% yearly return in your portfolio. But since that's a bit below the stock market's average, it's not unreasonable.
2. Be flexible on where you'll live
You may have dreams of retiring in a big city or hanging on to your 3,000-square-foot home so your hypothetical grandchildren will have a place to stay when they visit. If you're not able to boost your savings significantly ahead of retirement, then you can prepare for Social Security cuts by adopting a flexible attitude on your future living arrangements.
That could mean relocating to a part of the country where it's cheaper to exist, or downsizing into a smaller home. If you mentally prepare ahead of retirement, you may have an easier time making such a change.
3. Set yourself up to continue working in retirement
There's no need to look at retirement as the absolute end of your career. If you need to make up for Social Security cuts, working part-time is a great solution.
To that end, you may want to set yourself up to consult in your current field if it's work you enjoy doing. Spend the latter part of your career building a network, boosting your skills, and learning tips on how to succeed at self-employment.
If you don't really love your line of work and are only in it for the paycheck, spend some time developing skills that could set you up for more fulfilling work in retirement. And also, talk to people who are freelancing, consulting, or running a business in retirement to get pointers on how to gear up.
Social Security cuts are a strong possibility, but they do not have to wreck your retirement by any means. The more you prepare, the easier it should be to deal with those cuts if they end up happening.
