Although benefit cuts aren’t a given, it’s important to gear up for them — whether you’re already retired or not.
Social Security serves as a crucial source of income for millions of retirees today. And once your career wraps up, you may come to depend on those benefits to a large degree.
But Social Security is facing some financial problems that could result in benefit cuts if lawmakers don’t find an effective way to address them. According to the program’s most recent Trustees Report, those cuts could happen as early as 2035, which is when Social Security’s combined trust funds are expected to run out of money.
It’s important to understand that Social Security cuts aren’t a given. The program has faced the prospect before, but a broad reduction in benefits has always been avoided.
Still, things may not turn out that way this time around, so it’s important to prepare for the possibility of benefit cuts. And your approach to that should hinge on whether you’re retired or not.
If you’re not yet retired
If you’re still working, your approach to Social Security cuts will differ from someone who’s no longer earning a paycheck. In that situation, it pays to:
1. Boost your savings
Adding an extra $50 or $100 a month to your retirement account may not impact your quality of life tremendously — which is a good thing. But over time, those extra contributions could really add up. Once you turn 50, you can make catch-up contributions to an IRA or 401(k), so if you’re already maxing out, you may be able to fund your nest egg even further.
2. Set yourself up to work longer
A delayed Social Security filing — and the boosted monthly benefit it results in — can make up for a broad reduction in Social Security payments. You’re eligible for your complete monthly benefit based on your personal income history at full retirement age, which, if you were born in 1960 or later, is age 67. But if you delay your filing past that point, your monthly benefit will grow 8% a year, up until the age of 70.
3. Rethink some retirement plans
Maybe you were planning to retire in a big city or stay put and keep the 3,000-square-foot home you raised your kids in. If you expect Social Security cuts to impact your retirement spending to a large degree, it may be time to rethink some plans. It’s best to do that ahead of retirement so you can go in with a clear picture of how much you can afford to spend.
If you’re already retired
If you’re already retired, the advice to boost your nest egg before the end of your working years clearly doesn’t apply. But that doesn’t mean your situation is doomed, because you can do these things:
1. Assess your savings
Maybe your nest egg has grown decently in recent months, and you’re sitting on more savings than you think. It could pay to sit down with a financial advisor and figure out how much money you can afford to withdraw from your IRA or 401(k) monthly in the event of benefit cuts.
2. Join the gig economy for more income
If you’re retired with $150,000 in savings, a part-time gig may not enable you to double your nest egg in a year or two. But over time, those earnings could add up. As of now, Social Security cuts are a good 11 years away. If you’re able to earn $1,000 a month over the next 11 years, you’ll be left with an additional $132,000 in savings, not accounting for any sort of investment growth.
3. See if you can reasonably cut your spending
You may be doing just fine right now between withdrawals from your savings and Social Security. But a reduced benefit could force you to have to make some tough choices.
Rather than wait until 2035 to face them, assess your spending now and see if there’s room to reasonably cut back without harshly impacting your quality of life. Reducing a few small spending categories in the coming years could avoid forcing you to slash your spending drastically in 11 years, or whenever Social Security cuts happen (i.e., if they happen).
Social Security cuts could deal a harsh financial blow to millions of beneficiaries and put a wrinkle in your retirement plans. But if you take the above steps, you can set yourself up to better withstand them.
