Making Up for Social Security's Shortfall Is Easy

The Social Security Trustees published their annual update of the health of the Social Security Trust Funds on Friday, and the news was somewhat better than initially projected. Improvements in the Trustees' projection methods offset worsening economic data and plan assumptions, keeping the Trust Funds' projected emptying date as 2033.

As a result, you still have around 20 years to prepare yourself for the day the Trust Funds run out of cash, cutting benefits by an average of 25%. You still have enough time to invest to make up the gap, and indeed, if you're already planning for a comfortable retirement, it's one that's easily covered.

Keep on keeping on
Indeed, while my Foolish colleague Dan Caplinger notes the futility of the projections given the reality of politics, for you as an individual, with proper retirement planning, you may not even notice it's gone. After all, even without Social Security's pending benefit cuts, the program isn't exactly designed to let you retire comfortably just based on collecting from it. Per the Social Security Administration itself:

Social Security was never meant to be the only source of income for people when they retire. Social Security replaces about 40 percent of an average wage earner's income after retiring, and most financial advisors say retirees will need 70 percent or more of pre-retirement earnings to live comfortably. To have a comfortable retirement, Americans need much more than just Social Security.

If you already have a plan to cover the rest of your funding needs, be it a pension, a 401(k), an IRA, or even a traditional brokerage account designated for retirement, you can easily take this news in stride. After all, instead of having Social Security covering 40% of your former income and your other plans covering 30%, the numbers simply get reversed, with you responsible for covering 40% and Social Security 30%.

Your options
In essence, if you're already preparing, you have four choices for what to do now:

  • Do nothing differently. If you have a decent plan in place and are on track to cover 70% of your income assuming a healthy Social Security, you can simply accept that you'll live on 60% instead. If your kids are grown, your mortgage is paid off, your health is decent, and you don't have a huge yearning to travel, you may be able to make it just fine on that 60% level.

  • Work longer. Every year you put in adds to your earnings record, and Social Security uses your highest 35 years of adjusted earnings to compute your benefit. In addition, every year you delay taking Social Security up until age 70 adds to your benefit, potentially making up for the loss from the emptying of the Trust Funds. And let's not forget that more years of work means more years for your other savings and investments to compound on your behalf as well.

  • Save more cash. All else being equal, the more you sock away for your retirement, the more you'll wind up with. Add a bit more to your plan from now on with every paycheck, and 20 years from now, you may well wind up with enough extra in your account to cover for Social Security's shortfall.

  • Invest more aggressively. While more aggressive investing does expose you to more risk, the upside potential is that you may well get higher returns as a result. If you're willing to take on the additional risk, if you're successful, you'd cover the gap without either working longer or socking away more.

Where to invest?
There are countless possibilities for building your retirement portfolio to cover Social Security's gap, depending on your personal risk tolerance, timeline, and need for cash. Here are decent index-style ETFs across various asset types to consider when building your plan:

  • Domestic stocks. The Vanguard Total Market ETF is a one-stop-shop that gives you access to around 99.5% by market cap of the publicly held U.S. stocks traded on major exchanges. A mere 3% turnover and microscopically low 0.05% expense ratio makes this a low-cost way to invest in the overall stock market.

  • Investment-grade bonds. The iShares iBoxx $Invest Grade Corp Bond ETF owns nearly $24 billion worth of investment-grade corporate bonds. A small 4% turnover and low 0.15% expense ratio make this a low-cost way to get bond exposure.

  • Real estate. The SPDR Dow Jones REIT ETF has a bit over $2 billion invested in real estate investment trusts, attempting to match the Dow Jones Select REIT index. With a reasonable 7% turnover and a still pretty low 0.25% expense ratio, this is a reasonable way to get real estate exposure without turning yourself into a landlord.

  • Foreign stocks. Vanguard's Total International Stock Index ETF has nearly $90 billion in foreign stocks under its control, owning pieces of more than 6,100 stocks from 45 countries. With a mere 3% turnover and low 0.16% expense ratio, it's one of the lowest-cost ways to get your hands on foreign companies without being an international accounting expert.

  • Inflation-protected government bonds. The iShares Barclays TIPS Bond ETF has around $20 billion invested in U.S. Treasury inflation-protected bonds. With a low expense ratio of 0.2% and a reasonable 10% turnover rate, it's a decent way to get exposure to inflation-protected bonds. Note, though, that the recent auctions for those inflation-protected bonds have led to negative yields, which pretty much guarantees that your investment will lose purchasing power to inflation over time.

What's your plan to cover for Social Security's shortfall?
If you've already built a plan to supplement Social Security to get you through a comfortable retirement, it'll only take some minor adjustments to set you up for success once the Trust Funds empty. Share yours in the comments box below, and you just may inspire someone else to build one, too.

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