Social Security is a key source of income for millions of seniors today. But new data tells us that retirees have less and less confidence in the program.
Only 45% of retired workers think Social Security will continue to offer the same benefits as they do today, according to the Employee Benefits Research Institute. This is a decrease from the 51% of retirees who felt the same way last year. The question is: are the elderly today too pessimistic? Or are they really into something?
The future of Social Security: unstable but relatively secure
Many workers and retirees have the impression 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 labor power and continue to collect these taxes, the elderly will receive benefits in some form or form.
That said, according to the Catalan Ombudsman’s latest report, Social Security trust funds will be exhausted in 2034. Once that happens, the program could have to reduce benefits by up to 23%, which would certainly constitute a big hit for the current ones. and future recipients.
On the other hand, Congress has more than a decade and a half to intervene with a solution, and given the number of seniors who would be pushed far below the poverty line if these cuts actually occurred, lawmakers have much to lose to sit. back and doing nothing.
But even if benefits do not end up declining in the future, beneficiaries still face a very real problem: Social Security is not up to date with older people’s spending. The meager increases in the cost of living of the program have not done a good enough job of helping beneficiaries maintain their purchasing power in the face of inflation, partly because these increases have been small or non-existent in recent years, and partly because ‘ls eat. the increase in Medicare premiums even before the elderly get their hands on them.
All of this means one thing for current workers who plan to return to Social Security during retirement: be careful when you depend too much on those benefits, and instead save for your own future. Otherwise, you may have a big financial struggle along the line.
Building your nest egg
Let’s be clear: Social Security was never designed to keep seniors alone. At best, that is, none of the future cuts we are talking about, these benefits will replace approximately 40% of the pre-retirement income of the average worker. Most seniors, however, need almost double that amount to live comfortably (not luxuriously, mind you, just comfortably). Therefore, it is up to you, individually, to accumulate enough savings to collect wherever you leave Social Security.
Now, the good news is that the current annual contribution limits allow you to save seriously on a 401 (k) or IRA. Workers under the age of 50 can save up to $ 18,500 a year in the first and $ 5,500 in the second, and these limits increase to $ 24,500 and $ 6,500, respectively, among those over the age of 50.
Of course, not everyone can maximize a 401 (k) or even an IRA year after year, but if you commit to reserving a decent portion of cash each month and invest that money wisely, you could amass a good amount of wealth. . . Imagine you are 37 years old with no savings and you start booking $ 400 a month until you are 67 years old. We also assume that you invest a lot in stocks and therefore generate an average annual return of 7% of your savings (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 what you make from Social Security, could mean a pretty decent retirement. In the meantime, increase this monthly savings rate to $ 600 and you’ll have $ 680,000 to work with.
Plus, you can get more out of Social Security if you have strategies for claiming benefits. On the one hand, wait until your full retirement age to avoid your benefits being reduced. This age is 66, 67 years or somewhere in between, depending on your year of birth. In addition, if you withhold benefits after your full retirement age, you will receive an automatic increase of 8% for each year you delay up to the age of 70, and this increase will remain in effect for the rest of your life.
Finally, fight for increases during your career. The more money you get from each job, the greater your benefit to earn in retirement.
While you don’t need to cancel Social Security soon, you’ll need more than these benefits to cover your retirement costs. Save independently while maximizing these payments and you’ll be in a pretty good position to avoid financial stress when you’re older.
CNNMoney (New York) First published on May 1, 2018: 9:55 ET