Most Americans depend on Social Security to one degree or another to help fund their retirements. But the popular federal benefit is experiencing trouble and will face a serious funding shortage within the next decade if nothing changes.
The Social Security Administration (SSA) projects that Social Security trust fund reserves will be depleted by 2033, resulting in a potential 21% reduction in benefits.
If that happens, retirees who receive a $1,000 monthly benefit could see that fall to about $800. A $2,000 monthly benefit could be trimmed to about $1,600. Many retirees who depend on every penny of those benefits to pay their monthly living expenses may need to get creative in finding ways to cut back on their spending to make up for those disappearing dollars.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Unfortunately, many Americans seem unaware that this could happen, even though the SSA pulls no punches in discussing the situation on its website. The news media have also reported the concerns.
It’s a potentially grim scenario, but a key point to remember is that we don’t have to sit around and gloomily wait for the worst to happen. Each of us has roughly 10 years to put a personal plan in place to help overcome that benefit cut.
I regularly speak with clients about Social Security’s future and suggest actions to take now to account for that future missing 21%. Here are a few ideas on what you could do to prepare:
1. Set up a designated investment bucket
Create a diversified bucket of mutual funds that is separate from your other investments and exists for one reason: To make up for that anticipated Social Security cut. The idea is that you won’t draw from this bucket until the Social Security reduction happens. Having such a specially designated investment growing over the next decade will give you greater confidence that, even if Social Security falters, you will be able to replace the shortfall because you were proactive in looking ahead.
2. Buy a deferred income annuity
Purchase a deferred income annuity equal to the reduction. A deferred income annuity is a type of insurance policy that converts your savings into a guaranteed income stream beginning on a future date and continuing for the rest of your life. For example, if you anticipate the Social Security reduction would cost you $12,000 a year, then you can purchase an annuity that will provide that amount annually beginning in 10 years. You can also choose an option to ensure the monthly income would continue for the rest of your spouse’s life after your death.
3. Delay claiming Social Security benefits
The amount of your monthly Social Security payment varies depending on what age you decide to claim the benefit. For most people, the full retirement age for Social Security is 66 or 67. You can begin the benefit as early as age 62 but at a reduced amount. If you postpone claiming the benefit until age 70, though, you can increase the amount you receive and potentially make up the difference from the benefit cut.
Best-case scenario
What happens if you create a specially designated mutual fund bucket or buy a deferred income annuity, then 2033 arrives and Congress takes action so that the 21% cut never occurs?
That’s the best-case scenario because at that point you would have extra money for retirement. You could travel more, leave a larger inheritance to your children and grandchildren, or have money to help pay for long-term care if that becomes necessary.
No one knows for certain what Congress might do with Social Security in 10 years, though, so it’s wise to make preparations now. A financial professional can discuss these or other options with you to help you potentially avoid a shortfall even if Social Security experiences one.
Ronnie Blair contributed to this article.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
Insurance products are offered through the insurance business Endependence Financial. Endependence Financial is also an Investment Advisory practice that offers products and services through AE Wealth Management, LLC (AEWM), a Registered Investment Adviser. AEWM does not offer insurance products. The insurance products offered by Endependence Financial are not subject to Investment Adviser requirements. Ronnie Blair is not affiliated with Endependence Financial Insurance LLC or AEWM. 2756936 12/24
Want more guidance on retirement savings? Sign up for Kiplinger's six-week series, Invest for Retirement.
Related Content
-
Four Roth IRA Pitfalls Your Adviser May Not Tell You AboutYou may not be bound for Mordor, but Roth IRA pitfalls could upend your retirement if you're unaware of them.
-
Walmart+ vs. Amazon Prime: Which One Is the Better Deal?Walmart+ and Amazon Prime both promise free shipping, exclusive deals, and a suite of add-on services. But which one should you get, if any?
-
Four Roth IRA Pitfalls Your Adviser May Not Tell You AboutYou may not be bound for Mordor, but Roth IRA pitfalls could upend your retirement if you're unaware of them.
-
This Underused IRA Option Offers Tax Benefits and Income SecurityLooking to avoid running out of money in retirement? Consider longevity protection provided by a QLAC as a component of your retirement income plan.
-
Stock Market Today: Trump Drives Another Up-and-Down DayInvestors, traders and speculators as well as businesses and households continue to adjust to rapidly changing times.
-
Should You Sell Tesla Stock as Elon Unrest Grows?Tesla's CEO is wearing many hats and is managing them "with great difficulty."
-
These Four Books Explore How to Leverage Our Outrage PositivelyThe authors offer some powerful tools to help us find solutions to discord rather than remaining silent or blowing up in anger.
-
Social Security New Rule: Overpayments Must Be Paid Back 100%. Why It MattersAs of March 27, the SSA will require beneficiaries who have been accidentally overpaid to repay 100% of the money, reversing a previous policy that allowed for only 10% recoupment.
-
Medicare and Medicaid Employees Offered New Buyouts: What You Need to KnowFederal HHS workers who inspect food, research diseases and administer Medicare and Medicaid are offered $25,000 buyouts
-
Stock Market Today: Dow Off 890 Points on Tariff UncertaintyPresident Donald Trump still believes his ever-evolving plan for global trade will be "great for us," but "it takes a little time."
