3 Social Security compromises Donald Trump could make as president

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Social Security plays a big role in ensuring the financial well-being of our nation's retired workforce. The latest survey from national pollster Gallup found that almost 60% of all seniors relies on their Social Security check to be a "major" contributor of their monthly income, while another 28% expect their benefits check to be a "minor" source of monthly income. That's nearly nine in 10 retired workers who could be in financial trouble if Social Security weren't there for them.

However, as you're probably aware, the Social Security system isn't in the best financial health itself. Demographic shifts that include the mass retirement of baby boomers and the lengthening of life expectancies -- two shifts the founding fathers of Social Security could not have predicted -- are weighing on the program.

Based on the latest analysis by the Social Security Board of Trustees, the program will begin paying out more in benefits than it receives in revenue by the year 2020, which will ultimately lead Social Security to exhaust its more than $2.8 trillion in spare cash by 2034. Should this happen, Social Security will continue on, but benefits may need to be slashed by as much as 21% across the board. That's not a scenario that current and future retirees are looking forward to.

Trump's Social Security plan aims for indirect change

Now all eyes are on President-elect Donald Trump to understand what he might do to tackle Social Security's apparent budgetary shortfall.

During his campaign, Trump suggested that he would take a very hands-off approach with America's most important retirement program. Trump merely affirmed that it was the federal government's job to ensure that the promise made to retired workers is kept.

Rather than fixing Social Security by tinkering with the inner workings of the program itself, Trump's Social Security "plan" revolves around strengthening the American economy. A stronger economy that leads to wage growth and job creation would presumably lead to higher payroll taxes being collected. Payroll tax accounts for the lion's share of annual revenue collected for Social Security, with interest from its spare cash and taxation of benefits taking a distant backseat. If Trump's vision comes true, then Social Security's budgetary shortfall could be ebbed.

This aforementioned "vision" involves cutting and simplifying the individual income tax brackets, cutting the corporate income tax rate to 15% from 35%, spending roughly $1 trillion on infrastructure over the next decade, and making America energy-independent. The idea is that if businesses have more capital to work with, they'll reinvest and hire more; and if consumers have more money in their wallets, they'll be more likely to power our consumption-driven economy.

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The 10 best places to retire with only a Social Security check
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The 10 best places to retire with only a Social Security check

Boise, Idaho

Idaho’s state capital has plenty of affordable housing, costing retirees with a paid-off home a median of just $351 per month. For that low housing cost, retirees have access to a variety of amenities and entertainment. Idaho residents age 60 or older can register for classes at Boise State University for the bargain rate of $5 per credit hour (plus a $20 registration fee per semester). Or you could relax and stroll through a museum or enjoy the outdoor scenery. Seniors also get discounts to the Boise Art Museum, Zoo Boise, Bogus Basin ski area and on some Boise State sporting events. Best of all, a walk or bike ride on the 25-mile greenbelt along the Boise River, which runs through the center of the city, is free for everyone.

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Cape Coral, Florida

Waterfront property is a way of life in Cape Coral, which has over 400 miles of canals as well as access to the Gulf of Mexico and the Caloosahatchee River. You could easily spend your days boating, fishing or walking along the beach. But a house on or near the water won’t cost you a fortune. Median homeownership costs for people age 65 and older are $1,251 with a mortgage and $558 without one. The median rent is $983 per month. Many snowbird retirees reside in Cape Coral seasonally due to the pleasant winter weather. An added bonus: There’s no state income tax in Florida.

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Colorado Springs, Colorado

The natural wonders will draw you into this Rocky Mountain city. Retirees can linger among the scenic beauty at Pikes Peak, Seven Falls and Garden of the Gods, or find a volunteer position or part-time job sharing these mountain views with tourists. Athletes from across the country come to Colorado Springs to train at the U.S. Olympic Complex, and seniors can visit the facility at a discounted rate. Retirees who have paid off their mortgages get to live in this high-elevation mountain town for the bargain price of $393 per month. Older homeowners with a mortgage ($1,221) and renters ($827) pay more.

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Dayton, Ohio

When selecting a retirement spot, it’s important to make sure that doctors and hospitals will be there if you need them. Dayton’s largest employers are health care providers, and the city has several hospitals U.S. News has rated as high performing for specific procedures and conditions, including Miami Valley Hospital, Kettering Medical Center and Good Samaritan Hospital. But living near a variety of health care options doesn’t have to cost a lot, ranging from a median of $469 for retirees with a paid off house to $659 for renters and $1,080 monthly for seniors with a mortgage. Aviation buffs and air force retirees will enjoy the National Aviation Hall of Fame and the Dayton Aviation Heritage National Historical Park. The famous Wright brothers were Dayton natives.

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Grand Rapids, Michigan

Grand Rapids is known for its impressive arts scene, which includes Frederik Meijer Gardens & Sculpture Park, the Grand Rapids Art Museum and the Urban Institute for Contemporary Arts. The hometown of U.S. President Gerald Ford also has many outdoor recreation opportunities, including the Grand River and nearby Lake Michigan. The area has a booming health care industry, and Spectrum Health is a major employer and service provider. Housing costs are relatively low, with older homeowners paying a median of $1,113 with a mortgage and $434 without one. Retiree renters pay a median of $726 per month to live in the Grand Rapids area. “If you want to have a peaceful, more quiet life and also more reasonable housing, consider the middle west,” says Charles Zhang, a certified financial planner for Zhang Financial in Grand Rapids, Michigan. “The cost of living in the middle west is very reasonable.”

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Pittsburgh

A sports fans paradise, locals can root for the Steelers, Pirates and Penguins. The area is home to several major colleges, including Carnegie Mellon University and the University of Pittsburgh. UPMC Shadyside is ranked the 12th best hospital in the nation by U.S. News. But these big-city amenities are coupled with relatively low housing prices. Costs for older homeowners range from $1,069 with a mortgage to $468 without one. The median rent for retirees is $617 per month. Seniors age 65 or over can also ride the bus, T or Monongahela Incline for free.

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Richmond, Virginia

While northern Virginia has very high housing costs that aren’t likely to be covered by Social Security alone, costs drop significantly a little farther south in Richmond. “We’ve got a lot of folk in Richmond that retire from the D.C. area, and they are able to sell their house in the northern Virginia and D.C. area and maintain a really nice home when they come to Richmond,” says PJ Wallin, a certified financial planner and founder of Atlas Financial in Richmond. “They can buy a really nice home that might be half the cost.” The median retiree homeowner pays $1,282 per month with a mortgage, which drops to $465 among older residents who have paid off their homes. The median rent for senior citizens is $905 monthly. Virginia’s capital city is divided in two by the James River, which has whitewater rapids running through town. The area also has several well-regarded hospitals including the Virginia Commonwealth University Medical Center.

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Rochester, New York

While the winters on the southern shore of Lake Ontario can be cold and produce a prolific amount of lake-effect snow, the low housing costs might keep you in town. Older residents pay a median of $1,179 per month with a mortgage and $555 with a paid-off house. Seniors who rent are charged a median of $778 per month. Once the snow thaws, the flowers will bloom again, and Rochester has a large Lilac Festival to celebrate. The city boasts several major colleges, including the University of Rochester and the Rochester Institute of Technology, and the highly rated Strong Memorial Hospital.

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San Antonio

History buffs will delight in this old city that was colonized by the Spanish in the early 1700s. The San Antonio Missions were designated a World Heritage site in 2015. San Antonio is located on the southern edge of the scenic terrain and vineyards of Texas hill country. Health care is provided by the high-performing University Hospital. But these amenities don’t cost a fortune in San Antonio. Renters pay a median of $816 per month, while homeowners face costs ranging from a median of $1,146 monthly with a mortgage to $430 per month without one. The state of Texas also doesn’t have an income tax.

[See: 10 Retirement Hot Spots in the U.S.]

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Spokane, Washington

Spokane might be best suited to active retirees who love the outdoors. The Spokane River runs through town, and those who walk and bike along it are treated to views of several waterfalls, especially in the spring. Dams along the river are used to generate hydroelectric power. Several nearby ski resorts provide opportunities for winter fun. High-performing hospitals include Providence Sacred Heart Medical Center and Children's Hospital and Deaconess Hospital. Housing costs a median of $1,130 for retirees with a mortgage, but that drops to $425 per month among retirees who have paid off their home. Renters pay a median of $662 monthly.

(Cristie Guevara via Getty Images)

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Three Social Security compromises Trump may have to make

Of course, Trump's vision comes with a lot of question marks. If his economic plans fail to hit the mark, then Social Security may not be in any better shape than it is now. Also, Trump and numerous members of his own party haven't seen eye to eye this election season. This leaves the door open for Trump and Congress to potentially compromise on solutions for Social Security.

Here are three possible compromises Trump could make with Congress while in the Oval Office.

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Image source: Getty Images.

1. Raise the full retirement age

Though Trump was adamant during his campaign that he wouldn't consider raising the full retirement age, or FRA, increasing the FRA to factor in longer life expectancies has been a common suggestion of Republican lawmakers for quite some time. In fact, both Chris Christie and Jeb Bush campaigned on the idea of increasing the FRA to between 68 and 70 years of age during their recent presidential runs.

Your FRA is a dynamic number that's determined by your birth year. It's also the point at which you become entitled to receive 100% of your Social Security benefit. If you sign up for benefits prior to hitting your FRA, your benefit could be reduced by as much as 25% to 30%. Conversely, waiting until age 70 -- at which point your benefits max out -- to enroll could mean a 24% to 32% raise over what you would have receive at your full retirement age.

If Trump and Congress push through an increase to the full retirement age, then it would mean Social Security recipients get less of a benefit increase by waiting until age 70 -- and a considerably larger reduction by taking benefits early at age 62. On the flip side, it could encourage seniors to work longer (thus adding a little extra payroll tax revenue to the mix) and hold off on filing for benefits so early.

The downside? Retirees who are in poor health and those who don't have a means of getting a job could still be forced to enroll early, thus accepting a big cut in benefits from what they would have received had they been able to take benefits at their FRA.

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Image source: Getty Images.

2. Partial privatization of Social Security

Another possible compromise, although it's a long shot, is the partial privatization of Social Security. Though Donald Trump and Vice President-elect Mike Pence both reiterated during their campaign that privatization wasn't on the table, both men have previously called for the partial privatization of Social Security, albeit many, many moons ago.

The idea behind privatization is simple: Allow Americans the opportunity to gain access to a fixed percentage of their future benefits that they can invest however they'd like. The more than $2.8 trillion in spare cash in the Trust right now is predominantly invested in special-issue bonds and, to a much smaller extent, certificates of indebtedness. These bonds and certificates are yielding between 1.375% and 5.625%, but the vast majority of the high-yielding bonds will be going away within the next couple of years (a function of the Federal Reserve pegging the federal funds target near historic lows for the past eight years). In other words, the Trust isn't on track to earn a whole lot on its spare cash. Therefore, giving Americans the opportunity to invest a percentage of their benefits more aggressively could be beneficial.

On the other hand, allowing Americans the opportunity to invest their future benefits may not be the best idea. Financial literacy in the U.S. is nowhere near where it should be, and lower-income folks may wind up taking unnecessary risks in order to boost their future benefit.

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Image source: Getty Images.

3. Means-test for benefits

Finally, Trump and Congress may decide to implement a sort of means testing for benefits.

Means testing is targeted at well-to-do individuals and would be designed to reduce or deny benefits to wealthier individuals who simply wouldn't need it. During his campaign, Trump opined that he'd be willing to forgo his Social Security benefits and suggested that other wealthy individuals should do the same.

Means testing would be a potentially interesting compromise because it's liable to have a lot of public support. As we saw with the Gallup poll above, nearly nine in 10 Americans relies on Social Security to help make ends meet each month, meaning roughly one in 10 could probably forgo their payment and be no worse for the wear. Since it would affect so few people, means-testing for benefits would probably gain support among Democratic lawmakers, as well as a majority of the public.

The downside of means testing is that it wouldn't do much to mitigate Social Security's budgetary shortfall. Don't get me wrong: Anything is better than nothing when seniors could be staring down a 21% cut to their benefits. But Trump would need to do a lot more than coerce wealthy individuals to give up their Social Security benefits to fix America's most important social program.

Once again, this is mere speculation at this point, as Trump has suggested that he has no plans to alter Social Security. However, compromise has been the name of the game with every president that I can recall, making Social Security reform a real possibility with Trump as president.

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Watch out for these retirement gotchas
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Watch out for these retirement gotchas

Failing to Contribute in Time for Taxes

Yes, there can be a right time to contribute to your retirement account. After all, you do want to cash in on the tax benefits of your 401k, right? Moreover, you don’t want to be responsible for making a lump sum contribution to your retirement account, lest you go over budget or sink your emergency funds because you forgot to make regular contributions throughout the year.

Rather than wait until tax season to contribute to retirement savings, opt instead for automated payments. Adjust your contributions so you’re reaching the maximum contribution limit each year — and don’t forget, you can make catch-up contributions if you’re over the age of 50.

Scheduled payments to your retirement account alleviates any worries you might have over not meeting savings goals for the year. Plus, it takes the legwork out of actually saving.

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A stack of retirement account statements. Shot with shallow depth of field.

Paying High Advisor Fees

Like mutual funds that can carry surprisingly high expense ratios, some financial advisors charge high fees, and they don’t always make those fees easy to understand or identify. Sometimes it’s a percentage fee, and sometimes it’s in basis points, which imagines each percent as 100 basis points or a fraction of a percent.

In any form, financial advisor fees can add up to hundreds of dollars per year. Additionally, the financial advisor could be reinvesting the money into other actively-managed funds with their own hidden fees, which can further eat away at returns.

Research your options when it comes to finding a financial advisor. You can opt for a lower-cost online advisor, which can cut those fees to 0.25 percent, for example, or find financial advisors who charge by the hour, which can be an expense that’s easier to track.

Related: 10 Things You Need to Know Before Choosing a Financial Planner

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Not Spotting the Hidden Cost of Annuities

An annuity is a form of an insurance contract built into a 401k that invests the account holder’s money and, in return, pays out a steady income either in the future or right away. Retirement annuities offer tax advantages that appeal to many people. These investments can grow tax-deferred savings.

Unlike a 401k or IRA, annuities have no contribution limits, making them a useful tool for people close to retirement age and needing to catch up.

When it comes to setting up an annuity contract, however, people should be aware of the potential fees. Annuities can come with surrender charges, management fees and mortality and expense charges. You’ll want to review these fees closely to see whether an annuity works with your retirement strategy — or if you’re better off sticking to more traditional savings plans.

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Falling Into the Reverse Mortgage Trap

Not everyone can pay off a mortgage by retirement, and if you can’t, you need to consider the cost of your mortgage payment plus property taxes, homeowners insurance and all those random repair costs when things go wrong. Facing these and other financial concerns, some retirees who consider themselves cash poor but “house rich” turn to reverse mortgages.

But reverse mortgages are only suitable for people in specific circumstances and should be used carefully and strategically. You’ll want to consult a mortgage or financial advisor before proceeding with a reverse mortgage.

One of the biggest risks behind a reverse mortgage is the risk of losing your home. If you need to move out, your loan could become due. And, of course, you’ll need to fork over a lot of money for fees, which only eat more of the money you’re taking out against your home equity.

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Getting Suckered Into a Timeshare Scam

Whether your retirement plan includes downsizing to a tiny home or moving to a senior community, you need to watch out for housing pitfalls like high homeowners association fees and timeshare traps that target retirees. Any home purchase should be thoroughly researched, but people planning out their retirements on fixed incomes need to be particularly cautious of 55-and-over communities and timeshare opportunities that sound too good to be true.

Timeshare companies use high-pressure sales tactics to convince people to buy properties that typically come with annual maintenance fees and blackout dates on when owners can visit.

A common scam in recent years that targeted senior citizens in particular is when a person posing as a reseller calls the timeshare owner saying he has a buyer or poses as the buyer and then asks the owner for an amount of money up front to process the sale, according to a report from the California Department of Real Estate. The owners never see the money or hear from the scammer again. In legitimate sales, commissions are paid at the time of the sale, not up front.

The tens of thousands of dollars that people invest in timeshares they are only allowed to visit a few weeks out of the year could pay for numerous vacations across the U.S. and abroad. Don’t get trapped into a so-called dream vacation property that could become a nightmare.

Keep Reading: 42 Ways to Save for Retirement

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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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