Retirees are losing confidence in Social Security

Social Security serves as the primary source of income for millions of seniors today. But new data tells us that retirees have less confidence in the program.

Only 45% of retired workers believe Social Security will continue to provide the same benefits it does today, according to the Employee Benefit Research Institute. This is a drop from the 51% of retirees who felt the same way last year. The question is: are today’s seniors too pessimistic? Or are they really on to something?

The future of Social Security: Shaky but pretty sure

Many workers and retirees believe that Social Security is at risk of bankruptcy. The reality, however, is that the program cannot run out of money because it is funded by payroll taxes. Therefore, as long as we have workers and continue to collect these taxes, seniors will receive some kind of benefit.

That’s right, according to the board of trustees’ latest report, Social Security’s trust funds will dry up in 2034. If that were to happen, the program would likely have to cut benefits by 23%, which would certainly be a big blow to current incumbents. and future recipients.

On the other hand, Congress has more than a decade and a half to come up with a fix, and given the number of seniors who would be pushed well below the poverty line if those cuts actually happened, lawmakers have a lot to lose by sitting back. back and doing nothing.

But even if benefits aren’t cut in the future, recipients still face a real problem: Social Security can’t keep up with seniors’ spending. The program’s meager cost-of-living increases have not done a good enough job of helping beneficiaries maintain their purchasing power in the face of inflation, in part because those increases have been small or absent in recent years, and in part because they eat into them. Raising Medicare premiums before seniors take over.

All of this means one thing for today’s workers who plan to dip into Social Security in retirement: Be careful not to rely too heavily on those benefits, and save for your future. Otherwise, you could be in for a big financial struggle.

Building your nest egg

Let’s be clear about one thing: Social Security was never designed to support the elderly on their own. In the best case—that is, none of the future cuts we’ve talked about—these benefits will replace about 40% of the average worker’s pre-retirement income. Most seniors, however, need twice that amount to live comfortably (not elegantly, mind you, comfortably). So it’s up to you, individually, to accumulate enough savings to pick up where Social Security leaves off.

Now the good news is that today’s annual contribution limits allow for serious savings in a 401(k) or IRA. Workers under 50 can put up to $18,500 a year in the former and $5,500 in the latter, and those limits rise to $24,500 and $6,500, respectively, for those over 50.

Of course, not everyone can afford a 401(k) or even an IRA year after year, but if you commit to putting aside a decent amount of money each month and invest that money wisely, you can accumulate quite a bit of wealth. . Imagine you’re 37 with no savings and you start putting away $400 a month until you’re 67. Let’s also assume that you invest heavily in stocks and therefore generate an average annual return of 7% on your savings (that 7% is actually a couple of points). below the market average). At the end of the day, you’ll be sitting on $453,000, which, combined with whatever you take out of Social Security, could lead to a pretty decent retirement. Increase that monthly savings rate to $600, meanwhile, and you’ll have $680,000 to work with.

You can also get more out of Social Security by being strategic about claiming benefits. For one thing, wait until you reach your retirement age to avoid a reduction in your benefits. That age is 66, 67 or somewhere in between depending on your date of birth. Plus, if you continue benefits past your full retirement age, you’ll get an automatic 8% increase for every year you delay until age 70, and that increase will last for the rest of your life.

Finally, fight for promotions throughout your career. The more money you’ve earned from each job, the more income you’ll have in retirement.

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While there’s no need to withdraw from Social Security anytime soon, you’ll need more than those benefits to cover your costs in retirement. Save independently while maximizing those payments, and you’ll be in a pretty good position to avoid financial stress in your old age.

CNNMoney (New York) Posted May 1, 2018: 9:55 am ET