If you read the latest Social
Security Trustees Report, you're aware that the program's combined trust funds
are expected to run dry in 2034. And clearly, that's not great news. But before
you start panicking about your benefits, it's important that you understand the
implications of those trust funds running out.
Social Security won't go broke
The most important thing you should know about Social
Security's trust funds is that they're not the program's primary source of
funding. Rather, the bulk of the revenue that Social Security takes in comes
from payroll taxes.
Now for the first time in multiple decades, Social Security
is dipping into its trust funds, and will most likely continue to do so for the
next 16 years. The reason is that workers have been retiring at a relatively
rapid pace, and we're not getting enough replacement workers to allow the
program to take in as much money as it needs to pay out. However, once those
trust funds are depleted, Social Security will continue to have access to its
primary income stream, which means that in a worst-case scenario, future
benefits will be cut, not eliminated.
How much of a reduction are we talking about? Based on the
latest projections, come 2034, recipients might lose 21% of their benefits if
Congress doesn't step in with a fix. And obviously, that's a pretty harsh blow
for those who depend on those benefits to provide the majority of their income.
But if you're years away from retirement, you can take steps to compensate for
the potential benefits cut you might face, thereby ensuring that you don't end
up struggling financially.
You need savings of your own
One major myth associated with Social Security is that
seniors can live off their benefits alone. Well, the truth is that they just
plain can't. Even if benefits aren't cut in the future,
those payments will only replace about 40% of the typical worker's
pre-retirement income. Most seniors, however, need more like 80% of their
former earnings to pay the bills in retirement. Therefore, if you're still
working, you should be taking savings matters into your own hands regardless of
what happens to Social Security down the line.
If your employer offers a 401(k), that's certainly a good
place to start. At present, you can contribute up to $18,500 annually to a
401(k) if you're under 50, or $24,500 if you're 50 or older. This means that if
you're 50 years old and don't have a dime at present, maxing out your 401(k)
until age 67 will leave you with roughly $755,000 in retirement savings
provided your investments generate an average annual 7% return during that time
(which is more than doable with a stock-focused strategy). And that, combined
with whatever Social Security ends up paying you, could make for a pretty
Of course, not everyone has the ability to max out a
401(k), nor do all workers have access to one. But even if you're only working
with an IRA, whose current annual contribution limits are $5,500 for workers
under 50 and $6,500 for those 50 and over, or a lower savings threshold due to
personal circumstances, you can still amass a sizable sum if you save
consistently for many years. In fact, contributing $400 a month over 17 years
will leave you with $148,000, assuming that same 7% average annual return. Now,
that's not a ton of money, but it could be enough to help fill the gap where
Social Security leaves off.
No matter what happens to Social Security, there are two
things you need to take away here: The program is not going bankrupt, and it
also won't be enough to sustain you in retirement even if benefits don't get
cut. And the sooner you start establishing your nest egg, the greater your
chances of covering your expenses as a senior, regardless of what your benefits
ultimately look like.
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here for the original article from The Motley Fool.