Potential Reduction of Social Security Benefits Anticipated in 2035. Follow These Three Strategies for Preparation.
Retirement income for numerous seniors today heavily relies on Social Security. Once your career comes to an end, you might find yourself heavily relying on these benefits.
However, Social Security is currently facing financial issues that could lead to benefit reductions if lawmakers fail to find an adequate solution. As per the program's latest Trustees Report, such reductions might occur as early as 2035, which is when Social Security's combined trust funds are predicted to run out of money.
It's essential to remember that these Social Security reductions are not a certainty. Previously, the program has encountered similar predicaments, but widespread benefit reductions have been avoided each time.
Regardless, there's a chance things might turn out differently this time, making it crucial to prepare for potential benefit reductions. Your response to this situation should depend on whether you're retired or still working.
If you're not retired yet
If you're still employed, your approach to Social Security cuts will differ from those who no longer earn a paycheck. In the latter case, consider:
1. Enhancing your retirement savings
Adding $50 or $100 a month to your retirement account might not significantly impact your lifestyle, which is beneficial. But over time, those additional investments could accumulate considerably. At 50, you can make catch-up contributions to an IRA or 401(k), so if you're already maxing out, you could potentially expand your nest egg.
2. Planning for prolonged employment
Delaying your Social Security filing, resulting in a higher monthly benefit, can help offset a broad Social Security payment reduction. You may claim your full monthly benefit based on your personal income history at full retirement age, which, if you were born in 1960 or later, is 67. However, if you postpone your filing beyond that point, your monthly benefit will increase 8% a year, up until you reach 70.
3. Revisiting your retirement plans
Perhaps you were planning to retire in an expensive city or intended to maintain the 3,000-square-foot home you raised your children in. If you anticipate that Social Security cuts will significantly affect your retirement expenditures, it may be prudent to reconsider your plans. It's better to do this before retirement, so you have a clear understanding of your budget.
If you're already retired
If you're already retired, the advice to increase your savings before retirement no longer applies. However, you can still take action, such as:
1. Examining your savings
Your savings might have increased lately, leading you to believe you have more funds than you actually do. It could be helpful to consult a financial advisor and determine how much money you can afford to withdraw monthly from your IRA or 401(k) in the event of benefit reductions.
2. Participating in the gig economy for additional income
Even if you're retired with $150,000 in savings, part-time work may not help you double your nest egg within a year or two. However, over time, those earnings could accumulate. With Social Security cuts still 11 years away as of now, if you can earn $1,000 a month over the next 11 years, you'll be left with an additional $132,000 in savings, excluding any investment growth.
3. Assessing your spending
You might be living comfortably now between your savings withdrawals and Social Security benefits. However, a reduced benefit could necessitate difficult decisions.
Instead of waiting until 2035 to make these decisions (assuming they happen), evaluate your spending now and determine if there's room to cut back reasonably without significantly impacting your lifestyle. Reducing some minor spending categories in the near future could help you avoid drastically reducing your spending at a later date, like in 11 years or whenever Social Security cuts occur (if they occur).
Despite the financial issues facing Social Security, it's crucial to be proactive about your retirement income. If you're still employed, consider enhancing your retirement savings by adding $50 or $100 a month to your retirement account, or delaying your Social Security filing to increase your monthly benefit. On the other hand, if you're already retired, assess your current spending to determine if there's room to cut back, or participate in the gig economy for additional income to supplement your potential reduced Social Security benefits.
