Unless U.S. lawmakers pass legislation to bolster Social Security through higher payroll taxes or other funding sources, millions of recipients can expect a reduction in benefits in the next decade or so. That’s when the program’s Old Age and Survivors Insurance (OASI) Trust Fund is expected to run out of money.
When the fund taps out, Social Security will be solely reliant on payroll taxes for funding — and those taxes only cover about 77% of current benefits. That’s not to say everyone will automatically see their benefits sink by 23%, because no one is yet sure how things will eventually shake out. Even so, it’s a good idea to prepare now for a possible reduction in benefits in the future.
Here are four ways to bulletproof your retirement against potential benefit cuts.
1. Delay Claiming Benefits
The Social Security Administration encourages people to wait as long as possible to claim their benefits — and offers incentives for doing so in the form of higher monthly payments. You can claim retirement benefits as early as age 62 or wait as long as age 70, at which point there is no more financial advantage to waiting.
As GOBankingRates previously reported, waiting until age 70 to collect instead of age 62 increases your total monthly payment by more than three-quarters, according to a paper that appeared in the “Journal of Financial Planning.” On the other hand, claiming benefits as early as age 62 results in lifetime benefits that are about 30% less than what they’d be at full retirement age.
Here’s something else to consider: Waiting until age 70 to claim Social Security would boost recipients’ lifetime discretionary spending by a median $182,370 in today’s dollars, according to a study conducted by David Altig of the Federal Reserve Bank of Atlanta, Laurence Kotlikoff of Boston University and Victor Yifan Ye, a research scientist at Opendoor Technologies.
If nothing else, you should try to wait until full retirement age to claim benefits, which will ensure you get the full benefits you are owed.
2. Increase Savings
It’s always a good idea to boost your nest egg by saving more, though it’s not always easy. The best strategy is to figure out ways to cut discretionary spending and put the savings into your retirement accounts.
How much difference can increased savings make to your retirement security? A recent Motley Fool blog trotted out the following scenario: Suppose you begin funding your retirement plan at age 30 and keep doing so until age 67, which is full retirement age for most working Americans. Also, assume that you contribute $150 a month to your savings during that time.
If your invested savings deliver an average 8% annual return — slightly below the stock market’s average — you’ll end up with about $365,000 after 37 years. However, if you raise your contributions to $200 a month, you total amount saved would rise to $487,000, a difference of $122,000. If you contribute $250 a month, the total amount saved would be $609,000.
3. Max Out Retirement Account Contributions
This is a good year to take advantage of this strategy. For the 2023 tax year, the maximum contribution you can make to a 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan (TSP) is $22,500 — an increase of $2,000 from last year. In addition, the maximum Roth or traditional individual retirement account (IRA) contributions are now set at $6,500 (up from $6,000).
Maxing out your contributions ensures that your retirement savings grow faster, especially if you get a matching contribution from your employer.
4. Aim for Higher Investment Returns
The best way to get higher returns on stock market investments is to raise the risk profile in your portfolio. This typically means investing in growth-oriented stocks and funds rather than more conservative assets like bonds. This strategy works best for younger investors who have plenty of time to ride out the market’s inevitable ups and downs, but the long-term payoff can be substantial.
As SmartAsset noted, higher-risk investments offer correspondingly higher returns to offset the downside posed by its risks.