There’s no getting around it. Your federal retirement benefit’s future is uncertain.
The “security” part of Social Security does not live up to its name. The federal retirement programme is designed to replace only 40% of the average worker’s paycheck. That’s already a shaky definition of security. Worse, there is a looming problem with Social Security that could reduce that 40 percent income replacement even further.
The trust fund is dwindling
Social Security is funded through two sources: payroll taxes and a trust fund. The trust fund manages the year-to-year surpluses and deficits between tax revenue and benefits paid out. If tax revenue exceeds programme costs, the excess is deposited in the trust fund. If tax revenue falls short of programme costs, the trust fund fills the gap.
The problem is that the trust fund is expected to deplete by 2034. If no changes are made to the Social Security funding process, tax revenue will be the program’s sole source of funding. According to the most recent projections, tax revenue will only cover 78% of benefits. Benefits must be reduced to match the program’s income in the absence of additional funding.
Uncertainty about future benefits
Legislators have 12 years to come up with a solution that avoids a double-digit benefit cut. Will they follow through? Your guess is just as valid as mine. It’s probably safe to say that any solution will come at a cost to someone. It could include increased payroll taxes, reduced benefits, a later full retirement age, or some combination of these.
I’m hoping that legislators can fix Social Security in a way that doesn’t reduce my or your benefit – but I’m not counting on it. This is why:
In terms of money, I’d rather concentrate on what I can control. If I save enough for retirement and Social Security adds a few pennies on top, that’s fantastic.
It can take decades to save enough money for a comfortable retirement. If Social Security is restructured in the coming years and my expected benefit changes significantly, I may not have enough time to correct my course.
Lawmakers make mistakes from time to time. A hasty solution now could lead to bigger problems later. If I rely on Social Security, a reduction in my income in my 70s or 80s could be disastrous.
Oversaving has no drawbacks in my opinion. Having too much wealth in retirement allows me to choose between enjoying my golden years and leaving more money to my children.
Saving more now allows me to postpone Social Security in order to receive a larger benefit. According to current rules, I can maximise my retirement benefit by deferring payment until I am 70 years old. If my savings are sufficient to allow me to retire, that would not be a difficult decision to make.
In short, not relying on Social Security should save me from having to make difficult decisions later in life in order to stay solvent. I don’t want to be forced to sell my house, relocate out of state, or, worst of all, move in with my children in retirement. They and I both deserve better than that.
Making your own retirement plan
The average monthly Social Security benefit is $1,555, or $18,660 per year. You’d need an extra $466,500 in savings to cover that. That assumes you withdraw 4% of your balance each year to stay solvent for the next 30 years.
If your retirement account is mostly invested in stock funds, you could amass $466,500 in 20 years with an extra $950 monthly contribution. To be sure, that’s not a small sum to round up from your budget.
Don’t freak out. You can do this by increasing your current retirement contribution by $100 right now. Then look for additional opportunities to raise it later, such as when you get a raise or find lower-cost auto insurance. It is important to remember that reducing reliance on Social Security is not an all-or-nothing proposition. Any extra money you can set aside now will come in handy later.
Hopefully, Social Security will be around for as long as you and I are. But bolstering our savings accounts now can’t hurt, just in case things don’t go as planned.
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