You may have heard that Social Security is running out of money and will no longer be available in the near future. The good news is that this is not true.
Social Security may be looking at a financial deficit, but it is not likely to disappear completely. However, he risks seeing his benefits reduced.
In the coming years, Social Security expects to owe more in benefits than it collects in income. This is because the program’s main source of revenue is payroll taxes. But as baby boomers quickly leave the workforce and start applying for benefits, Social Security will experience a cash crunch. And while it may draw on its trust funds for a while to meet scheduled benefits, once those cash reserves are depleted, benefit cuts will be on the table.
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Meanwhile, the latest estimates indicate that Social Security trust funds will run out of money in just over a decade. Thus, the issue of benefit cuts is not a distant problem – it is a relatively short-term problem.
Now, if you’re far from retirement age, you might assume that you don’t have to worry about Social Security financial issues. After all, it’s a problem for your future self. But the sooner you recognize the impact benefit cuts could have on your retirement, the sooner you can take steps to offset it and avoid financial problems down the road.
Start saving now
Today, Social Security will typically replace about 40% of an average person’s pre-retirement income. But most seniors need about twice as much income to live comfortably.
Now let’s talk about benefit reductions. Once Social Security trust funds run out, benefits could be reduced by 20% or more. This means that they will provide even less replacement income. And that also means doing all you can to increase your retirement savings now — so you can rely more on your nest egg and less on Social Security.
Of course, saving for retirement might not be your top priority if that stage of life is decades away. But in fact, in this case, now is the perfect time to start saving, especially because you’ll be giving your money decades to grow. And that means you won’t have to part with a lot of money each month to build up a giant nest egg.
Let’s say you are 25 years old and retirement is in 40 years for you. If you save $300 a month in an IRA or 401(k) plan and invest that money at an average annual return of 8%, which is below the stock market average, you’ll end up with about $933,000. This could make Social Security cuts a lot less stressful for you.
But look at what happens when you don’t start saving for retirement until age 45. If you want to end up with $933,000, or something like that, you’ll have to be willing to part with $1,700 a month to make that possible. , assuming the same 8% yield. It’s a really difficult question. And that’s also why it’s better to build your nest egg from an early age.
Don’t bet on social security
Social Security isn’t going away, but that doesn’t mean you can count on it to provide you with a financially stable retirement. The sooner you recognize this and start saving, the less likely you are to experience financial hardship as a senior.
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