If your retirement date falls after 2034, the current estimate of your future Social Security benefits may not hold up.
That’s when the government fund that sends the monthly checks might run out of money to be paid in full. If Congress does not strengthen or limit Social Security, anyone age 55 or younger today could face reduced benefits.
“Two years ago, I would have said it was impossible. The adage has always been that there’s not a politician on the planet who’s going to keep their job if they talk about cutting Social Security,” says Kelly LaVigne, vice president of consumer insights at Allianz Life.
But in the current economic and political climate, it is not irrational to worry about the disappearance or compression of social security. A Northwestern Mutual 2022 Planning and Progress Study found that 43% of respondents were unconvinced that Social Security would be there for them when they needed it.
Regardless of the outcome of the 2022 midterm elections, Congress will be evenly divided and will continue to be dogged by deadlock. Changes to Social Security could come simply from legislative inaction if it lasts long enough.
During this time, the latest consumer price index figures show that inflation is slowing, but is still high enough to cause concern. That could lead to another big Social Security Cost of Living Adjustment (COLA), eroding the fund even faster. A month ago, the government said COLA would rise by 8.7% in 2023, the biggest increase in four decades.
So if you’re under 55, it’s time to take stock of what retirement with reduced Social Security looks like for you.
How to do the new calculations
Remember, you don’t have to go all the way to zero on your estimate of your future Social Security benefits.
“Young people should always be optimistic about receiving some level of Social Security benefits,” says Geoff Manville, senior director of government affairs at benefits consultant Mercer.
When Devin Carroll, a Social Security expert who founded the blog Social security information, runs his own retirement projections, he cuts the number in half. The impact this will have on you depends on how much you have saved and how much income you need to generate in retirement.
“If you take someone who is around 40 and making $100,000 now, their projected Social Security is around $3,000 a month. Then you have to look at how much you need to have in retirement money to replace that. It’s a big chunk of money,” Carroll says.
You need to consider a few additional parameters, such as whether Social Security will continue to pay spousal benefits to non-working spouses, which can be up to half the amount of the primary earner’s check. Or, perhaps, it could just be limited to higher income levels.
The full Social Security retirement age may also be pushed back beyond 67 in the future, so you may need to factor in more years of coverage for your expenses. Certain provisions of the proposed Secure 2.0 bill could also affect the funding of future retirements, such as the age at which to begin required minimum distributions (RMDs) from qualified plans.
To make approximate calculations, you can use a online retirement calculator which allows you to adjust the Social Security amount.
If you look at this 40-year-old couple earning $100,000, you can see how much of a difference it makes to them to retire at 67 and receive $6,000 a month combined in Social Security compared to half of this amount. If the couple saves 10% of their salary and they’ve already saved $50,000 so far, they’ll have $1.1 million in retirement and cover more than 60% of their current expenses, according to the AARP calculator. . With half the Social Security amount, this couple would have a shortfall of nearly $750,000, all things being equal.
In the worst case, where only one spouse works and the total family benefit is reduced to just $1,500 per month, there could be a shortfall of more than $1 million in retirement.
How to find replacement income
The solution to covering the missing money is one of those simple things that is almost impossible to do: you have to save more.
Better to know now than to be taken aback when it’s too late. You can start by increasing contributions to your 401(k).
“Taking full advantage of workplace retirement plans can help all workers, regardless of age, and build significant savings for their retirement years,” Manville says.
But it may take more than that.
“Have a traditional 401(k) and Roth, but don’t ignore unqualified accounts. These also have benefits,” says Carroll.
It says to keep in mind that you need cash to cover your living expenses before the RMDs take effect. If you keep things simple with an ETF portfolio, you can minimize the tax impact, he adds.
If you want to replace Social Security’s guaranteed income with some sort of monthly check until you die, it’s hard to match. You should consider some type of annuity product, which can be expensive and complicated.
“Social Security is one of the few assets that has the ability to pay for two lives which can also increase with cost of living adjustments to offset the effects of inflation. It’s also tax-efficient income,” says LaVigne. “There’s not much that can do that.”