This Is Your Last Shot at Preparing for a Comfortable Retirement

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This past Friday, the Social Security Administration released its annual Trustees' Report detailing the health of the Social Security system and its Trust Funds. And with each passing year, we inch closer to the date the Trust Funds run out of cash and benefits get slashed by about 25 percent -- and in some years, the date inches closer from the other direction as well.

But this time, for the second year in a row, the Trustees projected that the Trust Funds will empty by 2033. That's surprising, and better than what the experts had expected after the Congressional Budget Office provided its own dismal update on the Trust Funds earlier this year.

The Social Security Trustees say they've improved their projection methods, which is why the Trust Funds' "run dry" date held steady, despite the bad news from the CBO. Otherwise, the projections would have looked worse.

The Clock is Ticking

Regardless of whether you're relying on the Trustees' old calculations or their newer ones, the story doesn't really change all that much. You've got somewhere in the neighborhood of 20 years to prepare for the Trust Funds to run out of cash.

Once those funds run out, Social Security can only pay benefits based on the taxes coming in to the program. Unless SSI tax rates rise, or federal law is changed in a way that funnels other money into the program, at that point, Social Security will only be able to cover around 75 percent of its promised benefits.

Nobody really knows yet how those cuts would be spread across the population of recipients. However, if you expect to be alive in 20 years, you're better off preparing for those cuts than being caught short when they hit.

If you start investing for the Trust Funds' worst-case outcome now, you've still got a chance to get through retirement comfortably. Twenty years is a reasonable timeline for an investment plan to work. Much less than that, and it gets very expensive to fund a decent plan.

How Much Will You Need?

The average monthly benefit to a retiree currently sits at $1,266.81 and the Social Security Trustees' Report expects long-run inflation of around 2.8 percent. Projecting that inflation rate forward for 20 years, and it will take $2,200.77 a month to cover that typical retiree benefit in 2033. That works out to $26,409.24 a year in payments. Since payroll taxes will still cover around 75 percent of benefits, the gap you'll have to cover is expected to be somewhere in the neighborhood of $6,602.31 per year.

In addition to knowing how much you need to cover, the other key thing you need to know is how long you'll need to cover that gap.

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If your total life expectancy isn't much more than those 20 years, you may not need to boost your nest egg much to make up for those missing payments. If, on the other hand, you expect to still have plenty of life left in you in 2033, you'll need that extra money to last a good long time.

One of the most popular estimates for figuring out how much money you can take out of your nest egg, adjust it for inflation, and still have enough money to last for decades is known as the 4 Percent Rule. While that rule may not guarantee success, it's still a good starting point to work from.

In essence, if you're following the 4 Percent Rule, you can take 4 percent of the value of your portfolio out your first year. Each year, you adjust that number upward for inflation, and withdraw that amount. Following that plan, you have a reasonable chance of your money lasting at least as long as you do.

With that rule in mind, you'll need around $165,000 extra socked away by 2033 -- over and above the other funds you'd planned to have for retirement -- just to cover the gap in Social Security when the Trust Funds empty.

What Will It Take to Get There?

Coming up with $165,000 in 20 years is not easy. But it's easier to get started now than to wait.

The table below shows how much you'll need to sock away each month, based on a handful of different potential return rates, to reach that target. It also shows how much tougher that hurdle gets with the continued passage of time, if you delay getting started:

No. of Years

10% Annual Return

8% Annual Return

6% Annual Return

4% Annual Return

20

$217.36

$280.22

$357.24

$450.02

18

$274.84

$343.81

$426.12

$523.01

16

$350.86

$426.28

$514.05

$615.11

14

$453.69

$535.86

$629.26

$734.53

12

$597.09

$686.29

$785.43

$894.93

10

$805.77

$902.22

$1,007.19

$1,120.94

Source: Author's calculations.

If the numbers in that top row look daunting, just look at the rows below them to see how much tougher it gets as time continues to pass. Twenty years is about the minimum amount of time that it takes for the magic of compounding to really work for you, and we've got about 20 years before the Trust Funds are expected to empty.

If you want to cover yourself for Social Security's shortfall, now really is your last decent chance to begin.

Chuck Saletta is a Motley Fool contributing writer. For more on making the right financial decisions today to make a world of difference in your golden years, learn about The Shocking Can't-Miss Truth About Your Retirement in this free report from The Motley Fool.

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