How Social Security Benefit Cuts Should Change Your Retirement Planning

Social Security serves as a critical income stream for millions of retirees right now. But in the coming years, the program is facing a crisis.

Social Security relies primarily on payroll tax revenue to keep up with benefit payments. But a shrinking workforce coupled with an expected surge of new benefit claims as boomers retire is apt to put a strain on Social Security’s resources, not to mention rob the program of much-needed revenue in the coming years.

Social Security’s Old-Age and Survivors Insurance Trust Fund, which pays retirement benefits, is expected to be out of money by 2032. At that point, Social Security may be looking at a 23% benefit cut. And that’s something all working Americans need to plan for.

The math could be changing

Let’s get one thing out of the way. Even if Social Security doesn’t end up having to cut benefits, it’s not a good idea to try to retire on those monthly checks alone.

If you earn a typical wage, you can expect Social Security to replace about 40% of it, assuming no cuts. But that means slashing your own pay by 60%, which you may not want to do. So either way, it’s important to have savings for your retirement.

However, with potential Social Security cuts looming, it’s more important than ever to build a strong nest egg. And rather than have your savings supplement your Social Security checks, you should aim to do things the other way around — have your savings cover most of your retirement expenses, and let Social Security pick up the slack or cover leisure and fun spending.

Of course, building a large nest egg is easier said than done. But with the right strategy, you may find that it’s more than doable.

First, start early. The more years you give your savings to grow, the more you can benefit from compounded returns in your IRA or 401(k).

Secondly, don’t give up free money for your retirement. If you have access to a 401(k) plan with an employer match, contribute enough to claim every penny of it.

Next, make sure you’re investing your retirement savings efficiently. Bonds are a great investment if your goal is stability. But if you’re trying to grow a retirement nest egg, they should not comprise too much of your portfolio.

Instead, go heavy on stocks when retirement is decades away. If you diversify across different market sectors or load up on broad market ETFs, you can protect yourself from losses while setting your savings up for strong returns.

This doesn’t mean your portfolio won’t sometimes lose value from year to year. But if you have a 30-year window to work with, you’re likely to build a lot of wealth over time with this approach.

It’s best to plan for smaller benefits

Social Security cuts are a possibility right now, but they’re not guaranteed to happen. Lawmakers have some changes they can implement to shore up Social Security and prevent the cuts so many people fear.

However, the solutions to fix Social Security’s finances aren’t great. They include raising the payroll tax rate and forcing workers to wait longer to become eligible for their monthly benefits without a reduction.

In other words, fixing Social Security enough to prevent benefit cuts isn’t going to be easy. So it’s best to assume those cuts are happening, even if they don’t in the end.

If you plan for the worst, you’ll be in an even stronger position to thrive in retirement if benefits aren’t slashed and you have a very generous nest egg to work with.