Fidelity warns Social Security retirees are facing a $10,560 year loss. Are you prepared for the fallout?
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Over a third of Americans (1) expect Social Security to be their primary income source, while 69% say they’ll rely on their benefits to some degree to help make ends meet.
Americans aren’t wrong to want to rely on Social Security. Workers have paid into the program their entire careers, and the program promises lifetime income with built-in cost-of-living adjustments to help retirees avoid losing buying power to inflation.
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Unfortunately, there’s a big problem. In fact, Fidelity (2) sounded the alarm recently about substantial losses seniors are facing. Some retirees could lose five figures in annual income, leaving them at risk of serious economic hardship in their later years.
The problem stems from Social Security’s trust fund being in trouble.
The most recent trustees report (3) warns that the Old-Age and Survivors Insurance (OASI) trust fund is expected to be depleted in the fourth quarter of 2032.
If and when the trust fund runs out, Social Security recipients will face an automatic benefit cut unless something drastic changes. Social Security can’t borrow or print money, so it can only pay benefits from revenue it collects and, when revenue isn’t enough, from money in the trust fund.
Its revenue comes from payroll taxes on current workers, as well as taxes on Social Security benefits owed by higher-income recipients. However, the revenue is enough to pay just 78% of promised benefits. That means anyone collecting Social Security would find themselves with 22% less deposited in their bank account as early as 2032.
That’s not very many years away, and that 22% cut reflects real loss. That’s why Fidelity issued a dire warning, making clear that the average married couple stands to lose a shocking $10,560 per year in Social Security income if the automatic benefit cut occurs.
Sadly, this isn’t the only bad news retirees are facing.
Fidelity said lawmakers can still avert the problem, and they most likely will, because a 22% cut to retirement benefits would be very, very unpopular with voters. Unfortunately, Fidelity’s analysis of the three proposals for fixing Social Security’s finances reveals that all create some big losers.
One proposal would change full retirement age. FRA changed already when Social Security was reformed in 1983, gradually shifting from 65 to between 66 and 67. Because the change was phased in over time, anyone born in 1960 or later now has an FRA of 67 — two full years later than the age retirees used to have to reach to get full benefits.
Pushing FRA back effectively cuts benefits for every claimant. Either you wait longer to start benefits (and forgo checks while doing so), or you face cuts from early-filing penalties.
Other proposals include raising Social Security taxes by removing the payroll cap deduction or bringing more workers into the system. The cap limits the income on which Social Security tax is collected, so higher earners would pay more, while bringing more workers into the system would likely mean government workers currently exempt from Social Security tax must start paying it.
These proposals face major headwinds, and powerful stakeholders oppose them, so it’s unclear whether any is viable. But unless lawmakers make these or other reforms, married couples collecting benefits need to be ready to take a $10,560 annual hit in just over 5 years.
Fortunately, you can take steps to help prepare for the fallout. Here are some options.
Invest in your future automatically
If you stand to lose some of your Social Security benefits, you’ll likely have to make up the shortfall elsewhere. Chances are good you’ll rely on your investments to do that. Unfortunately, many people simply don’t have enough invested.
That’s where Acorns comes in. With it, you can automatically invest spare change from your everyday purchases into a diversified portfolio of ETFs managed by experts at leading investment firms like Vanguard and BlackRock.
This way, a $5.25 snack becomes a $6.00 purchase, and a 75-cent investment in your future, proving you don’t need thousands to get started with investing. Even small contributions add up over time.
Saving just $20 weekly adds up to $20,000 over 20 years. Invested at an average annual return of 10%, that $20 can grow to more than $63,000.
And Acorns is now even offering a 3% IRA match on new contributions during your first year with Acorns Gold, so you can get the ultimate jumpstart on your retirement savings with a little extra help.
Making investment contributions consistently can help take the sting out of looming Social Security cuts, but it’s not the only option.
Have a cash cushion
If you’re already retired, or close to it, you have less time to prepare. One of the best ways to do that is to have a cash cushion.
You can rely on accessible cash to cover the shortfall if Social Security benefits get cut, so you don’t have to withdraw too much from investment accounts too fast or make withdrawals during an economic downturn that forces you to lock in losses.
A high-yield account like a Wealthfront Cash Account can be a great place to grow your uninvested cash, offering both competitive interest rates and easy access to your money when you need it.
A Wealthfront Cash Account currently offers a base rate APY of 3.55% through program banks. With a new client boost and direct deposit incentive, referred clients can earn up to a 4.55% APY.
That’s 10 times the national deposit savings rate, according to the FDIC’s September report.
With no minimum balances or account fees, as well as 24/7 withdrawals and free domestic wire transfers, your funds remain accessible at all times. Plus, you get access to up to $8 million FDIC Insurance eligibility through program banks.
Optimize your investments for success
When you work hard to invest, you want your investments to perform as well as possible, and you also want to make sure taxes don’t eat into your gains.
WiserAdvisor can help you connect with experts to optimize your investments and engage in strategic tax planning if you have a portfolio of $250,000 or more.
After you answer a few simple questions about your savings, retirement timeline, and overall investment portfolio, WiserAdvisor will review its network of fully vetted, reputable advisors who can provide the advice you need to help accomplish your goals.
You can then schedule no-obligation consultations with your matches to determine who is the best fit.
WiserAdvisor is a matching service and does not provide financial advice directly. All matched advisors are third parties, and specific financial results are not guaranteed.
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Article Sources
We rely only on vetted sources and credible third-party reporting. For details, see our ethics and guidelines.
Transamerica Institute (1); Fidelity (2); Social Security Administration (3)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.