Who's Ready for a 17% Social Security Pay Cut?
Social Security is a critical income source for millions of retired seniors today. And without those benefits, many seniors would no doubt struggle to make ends meet.
But unfortunately, Social Security's finances are in a shaky spot. In the coming years, the program is expected to owe more in scheduled benefits than it collects in payroll taxes.
Image source: Getty Images.
Thankfully, Social Security has trust funds it can tap to bridge that gap for a period of time. But that period is dwindling down.
According to Social Security's latest Trustee Report, its combined trust funds may be depleted as early as 2035. From there, Social Security may need to slash benefits by 17% if lawmakers don't find other ways to pump more money into the program.
Clearly, that's not the best of news. But it also doesn't mean you need to write off the idea of a comfortable retirement.
Strong savings can make up for smaller benefits
It's true that many older Americans today are heavily reliant on Social Security. But with a savvy approach to savings, you don't have to be.
Let's imagine you're in your 30s and are hearing about Social Security cuts now. Chances are, you have another 30 years of work ahead of you. That gives you plenty of time to build a strong enough nest egg that a 17% Social Security cut won't really hurt you.
In fact, if you manage to sock away $500 a month over the next 30 years at an average annual 9% return, which is a notch below the stock market's average, you'll end up with a nest egg worth about $818,000. With savings like that, you may be more than well-equipped to cope with a future monthly Social Security check that's 17% less than what it should've been.
Of course, if you're older, you might need to really ramp up on retirement plan contributions to make up for Social Security cuts. But it's something that can be done. And even if you're already retired, joining the gig economy could put extra cash in your pocket -- enough to replace the Social Security income you may inevitably end up losing.
Another thing you can do if you haven't claimed Social Security already is delay your filing a few extra years. For each year you hold off on taking benefits beyond full retirement age, up to age 70, your payments get a permanent boost. So if benefits are then cut, you'll be starting off with a higher baseline.
Benefit cuts aren't a given -- but it's best to assume that they are
Let's be clear about one thing. This isn't the first time in Social Security's history that the program has faced benefits cuts. And on previous occasions, lawmakers have always managed to avoid them.
As such, it's important to recognize that Social Security cuts aren't a sure thing. But it's also important to assume that they're coming, just in case. This way, you can plan accordingly and avoid a personal financial hit.
In fact, even if Social Security benefits aren't reduced broadly, you should know that in a best-case scenario, they'll replace about 40% of your pre-retirement income if you earn an average wage. Most seniors need roughly twice that much money for a comfortable lifestyle. So it's a really good idea to aggressively fund your nest egg during your career no matter what.
What stocks should you add to your retirement portfolio?
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now. The 10 stocks that made the cut could produce monster returns in the coming years, potentially setting you up for a more prosperous retirement.
Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $584,435!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
The Motley Fool has a disclosure policy.
