Social Security Cuts: How To Know Whether You Are Prepared
Social Security has been the backbone of the American retirement system since it was signed into law in 1935. But as important as Social Security has been to American financial security, it was never intended to be the sole source of income for retirees.
Unfortunately, among elderly Americans, 12% of men and 15% of women depend on Social Security for more than 90% of their income, according to the Social Security Administration. Worse still, as currently configured, Social Security is heading for potentially large cuts in as little as 10 years, without intervention.
For those relying even in part on Social Security, this is disconcerting news. According to a recent GOBankingRates study, nearly one-third of Americans polled said they were not prepared to handle any possible cuts to Social Security benefits. If you count yourself in this category, here are some suggestions for how to prepare yourself.
Potential Social Security Cuts
As early as 2033, Social Security benefits may be cut by as much as 23% without Congressional intervention. This is due to the way that Social Security is structured. Program rules require money to come from within Social Security itself. Since the Trust Fund is estimated to dry up by 2033, ongoing benefits must then be paid strictly from incoming payroll taxes. This alone is not enough to fund benefits in full, which results in the estimated 23% drop in payouts.
While Congress has a number of ways to increase funding for Social Security, few of those are desirable. One option, for example, is to raise payroll taxes from 12.4% to 17.3%. Another is to extend the retirement age. But there’s a chance that any proposed fix is too little too late — or that there are no changes made at all. In either case, a cut in benefits will be coming at some point.
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How To Boost Your Future Benefit
Whatever changes the Social Security Administration makes to the program are beyond your control. But there are two things you can do to boost your future benefit as high as possible, perhaps even enough to overcome any cuts. This is because the SSA uses just two factors to calculate your benefit amount: your income and your retirement age.
The first component, your income, is based on your highest 35 earning years only. If you have worked fewer than 35 years, each year you are short will count as no income for purposes of calculating your Social Security payout. In order to counteract any future cuts, you’ll want to earn as much as you can for at least 35 years.
The second component, your retirement age, also plays a large role in how much you’ll receive. Although “full retirement age” for most workers is now 67, you can file for benefits as early as age 62. But you’ll receive as much as 30% less than you would at your full retirement age. If you can postpone filing for benefits until age 70, your benefit will increase by a significant 8% for each year between 67 and 70. In other words, at age 70 your benefit will be 24% more than it would be at your full retirement age.
Many workers can’t afford to wait until age 70 to file for benefits; but, if you’re looking for a way to increase your payout that’s in your control, you’ll want to delay claiming those checks for as long as possible.
Options If You Feel Unprepared
Even if you understand how Social Security operates, it’s still easy to feel unprepared, especially if benefit cuts seem to be on the horizon. But the earlier you can take action, the better you can prepare yourself for any eventualities. Here are a few steps you can take.
Max Out Retirement Plan Contributions
Since you shouldn’t be relying on Social Security to fund your own retirement to begin with, it’s best to take things into your own hands as soon as possible. If you max out your retirement plan contributions, not only will you build your tax-deferred nest egg more rapidly, you can benefit from “free” money in the form of employer matching contributions.
Relocate or Downsize
If you can’t boost things on the income side of the equation, try to tame down your expenses. Some of the best ways to do this in retirement are to relocate and/or downsize. America is a vast country, full of both expensive and cheap places to live. In many cases, simply relocating can save you plenty of money. If you prefer to stay put, consider downsizing. By the time you retire, you may no longer need a larger house. If that’s the case, downsizing can not only cut your expenses but also possibly free up some equity from your existing home.
Plan on a Side Gig
In some cases, your only option may be to increase your income via a side gig. If you think this might be a possibility as you approach retirement, start planning on the type of part-time work you might enjoy doing that will also bring some extra cash flow into your budget. Picking a gig you want to do ahead of time rather than being forced into one by Social Security cuts is always a better option.
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