If you are depending at all on Social Security to help support you when you retire, even as supplemental income, there are a few things you need to know. You are probably aware that Social Security is in danger of becoming deficient or defunct between 2028 and 2033. While Congress has time to take action to save the program—Americans wait (im)patiently to see if they will. If no actions are taken to save it outright, it’s a bit unclear exactly what will happen.
The big question is—how can you prepare for the potential impact of not being able to count on Social Security when you retire?
You don’t have to wait until Congress decides on the future of the funds. There are steps you can take right now, regardless of your age, to help ensure you are financially secure in retirement.
It’s quite possible that you can save enough yourself to offset—if not replace—Social Security benefits that may diminish or disappear by the time you retire.
Here’s How You Can Prepare for Social Security Cuts
Start saving money now.
If you are younger, time is on your side. The earlier you start saving, the more money you’ll save for retirement. The earlier you start contributing to a retirement account, the longer the account has to grow before you retire.
If you’re in your early twenties, compound interest plays a huge role in how your retirement and/or investment accounts grow over time. Provided all funds are left in the account to be reinvested, you’ll earn interest on the interest paid—over and over and over again. In fact, if you start your retirement account in your teens and contribute enough over the course of just a few years—teens can build a million dollar IRA by retirement age thanks to compound interest.
If you’re older, you can take steps to capture more capital to invest. Minimize your current expenses as much as you can. It’s amazing how much you can save once you put your mind to it. Eat out less. Forego a vacation or two. Decide to give up a bad habit that costs you money. Downsize your home. These ideas and any other money-saving practices you employ can help you build sizeable savings to supplement your retirement income.
Max out your retirement plan contribution limits.
Whether you have an IRA or 401(k), your plan has annual contribution limits. If you aren’t already doing so—start contributing up to those limits every year. The more you contribute, the more you have in the account to invest.
If you have a Roth or traditional IRA, the contribution limit (for 2020) is $6,000. If you are 50 years old or older, you’re able to make a “catch-up” contribution of an extra $1,000 for a total of $7,000.
The 401(k) contribution limit for an employee is $19,500 (in 2020), with a catch-up contribution of another $6,500. Your employer may or may not participate in a profit-sharing contribution, but if they do, make sure to take advantage of it. The more cash that makes into your account, the better it can work for you to build retirement income.
Open a health savings account to offset retirement income.
Health savings accounts (HSAs) can greatly supplement your retirement income. These accounts allow you to save dollars for qualified medical expenses. The less of your actual retirement income you have to spend on increasingly expensive medical care, the more money you’ll have to actually live on.
The benefits of HSAs are significant—now and when you retire. As long as your health insurance plan is HSA compatible, you can take advantage of the benefits of an HSA. In the here and now, you can take tax deductions based on your yearly contributions. Income grows in the account on a tax-free basis. And all withdrawals for qualified medical expenses are tax free, as well. You don’t have to wait until you retire to withdraw funds to pay for those expenses, either. These accounts are designed to help families with medical expenses before retirement. But, the funds in the account accrue year after year—earning interest. And although the funds are initially designated for qualified medical expenses, once you reach the age of 65, you can take tax-free withdrawals of your HSA funds for any reason.
Chart out your retirement budget to include inflation
Now, no one can predict the future and it’s nearly impossible to pinpoint exactly how the inflation rate may rise by the time you retire. But, based on historical data, inflation rates have fluctuated between 3-6 percent, depending on the time period. A financial advisor or a CPA can help you make projections that can help you determine the rate to account for in your own strategy. It’s critical to calculate inflation, though, because if it happens to be high when you retire and you haven’t accounted for it, your retirement dollars will be impacted.
Final Thoughts on Potential Cuts in Social Security Benefits
The above are a few strategies you can use at any age to prepare for potential cuts in Social Security benefits you may face in retirement. The uncertainty surrounding the fate of the funds is not something to take lightly. But it’s also not something you should worry about when you have options. Focus instead on different ways you can earn and save the funds to offset potential deficit. Even though Congress may make moves to preserve those Social Security, it won’t hurt to start saving extra—just in case. Worst case, you will hopefully have saved enough to cover any loss in Social Security benefits. Best case scenario, If Social Security is saved, you’ll find yourself with a bit of extra cash that will only enhance your financial security during your golden years.