Millions of seniors today collect a monthly benefit from Social Security. And that income plays a big role in allowing them to cover their essential expenses. But Social Security is facing its share of financial difficulties -- so much so that many people worry whether it will manage to stick around for the long haul.
In fact, a recent survey by Allianz found that 80% of Americans are concerned about the future of Social Security. And if you're one of them, it's important to know what's going on with the program, and what steps you need to take in light of that information.
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What's happening with Social Security?
Social Security is not on the verge of going bankrupt or disappearing. With that out of the way, the program is facing a financial shortfall as baby boomers exit the workforce in droves, taking much-needed payroll tax revenue with them.
Social Security can keep up with scheduled benefits in the coming years by tapping its trust funds. Once those cash reserves run dry, benefit cuts are a strong possibility.
The Social Security Trustees recently anticipated that the program's trust funds will be out of money by 2034. That date could change, for better or worse, in the coming years. But either way, there will likely be a point when Social Security can't pay benefits in full without lawmakers' intervention. So current and future beneficiaries alike will have to prepare for that possibility.
How to make up for benefit cuts
Although Social Security cuts aren't set in stone, it's best to accept that they could become reality. But if you're still working, there's one simple thing you can do to make up for them: Save aggressively so you have a large nest egg to fall back on.
Let's say you're 40 years old and have yet to start saving for retirement. You might assume you're doomed to struggle, but that's not at all the case.
If you make spending changes in the near term that free up $500 a month for retirement savings, and you continue to save $500 a month for the next 25 years, you'll end up with a nest egg worth almost $439,000 if your investments generate an average annual 8% return (which is a bit below the stock market's average).
If that doesn't sound like a large enough nest egg to you, and you have already missed out on many years of savings, then you'll clearly need to increase your contributions. But if you're younger, you might do quite well by funding your IRA or 401(k) plan with $500 a month over time. In fact, socking away $500 monthly over 40 years instead of just 25 will leave you with a nest egg exceeding $1.5 million, assuming that same average annual 8% return.
Save now in case benefit cuts happen
While Social Security isn't in danger of going away completely, benefit cuts are pretty likely. That's something you might be worried about, and understandably so. But if you do your part to save and invest aggressively, you can build up enough savings so that Social Security cuts don't matter as much as you might expect them to.
