There has been talk for years that social security may run out of money, and the latest administrators’ report confirms this. Released in late April, the report says that by 2035, social security is expected to deplete its combined trust funds, leaving the program with no excess cash reserves. At this stage, current and future beneficiaries risk reducing their planned benefits by 21%.
Obviously, this is not good news at all – especially for people who are already on social security and who rely heavily on these benefits to make ends meet. But if you are years away from retirement, there are steps you can take to ensure that future reductions in benefits do not harm you as a senior.
Take the savings business in hand
You can count on social security to provide most of your retirement income. But benefit cuts aside, it’s not something you should do.
Even if the benefits are not reduced, Social Security will only replace about 40% of your early retirement income if you are an average employee. Most seniors, however, need about twice that amount to meet their bills and maintain a comfortable lifestyle.
Where will this money come from? If you have a pension, this is a source of income to be hoped for. If you plan to work part-time in retirement, this is another. But a good bet is to rely heavily on the savings you realize by funding a 401 (k) or an IRA while you are still actively part of the workforce.
Currently, you can contribute up to $ 19,500 to a 401 (k) if you are under 50, or $ 26,000 if you are 50 or older. The IRA contribution limits are much lower – $ 6,000 for workers under 50 and $ 7,000 for those 50 and over. Maximizing an IRA is much more feasible than maximizing a 401 (k), but the reality is that you don’t necessarily have to reach the annual limit on either type of account to amass a significant amount of wealth at time for retirement. You just need to save regularly for most of your career and invest wisely in your 401 (k) or IRA.
Imagine that you are 35 years old before you retire. Here’s what your savings balance could increase based on your monthly pension plan contribution, assuming an average annual return on investment of 7% (which is actually a few percentage points below the stock market average ):
|Amount saved each month||Total accumulated over 35 years with an average annual return of 7%|
|$ 200||$ 332,000|
|$ 300||$ 498,000|
|$ 400||$ 663,000|
|$ 500||$ 829,000|
Of course, these numbers will be very different if your savings window is longer or shorter, or if you play more carefully with your investments in the retirement plan and are unable to generate the same returns. However, the fact is that if you save regularly and invest wisely, you may end up in a position where you do not have to depend as much on social security in retirement and, as such, do not worry as much. reduction of benefits.
One last thing: this reduction in benefits is not written in stone. Legislators are committed to avoiding this scenario, mainly because it would likely plunge many current retirees into poverty, so there is a good chance that Congress will step in and prevent benefit cuts from happening in 15 years. But it never hurts to have your own backup plan.