The Social Security Math Just Got Worse for Future Retirees

If you're counting on Social Security to cover a large share of your retirement expenses, the latest projections from the program's Trustees should read like bad news. In their latest report, the Social Security Trustees say the program's Old-Age and Survivors Insurance Trust Fund -- which pays retirement and survivor benefits -- is now expected to run out of reserves in late 2032.

If lawmakers fail to act before then, incoming payroll tax revenue may only cover about 78% of Social Security's scheduled benefits, resulting in an automatic 22% cut for current and future retirees. And while that doesn't mean that Social Security is going bankrupt, a cut that drastic could deal seniors a huge financial blow.

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That's why it's important to prepare for Social Security cuts, even though they aren't set in stone.

Can your retirement plan survive a 22% benefit cut?

If you're saving well for retirement and only expect Social Security to cover a portion of your monthly expenses, then a 22% reduction in benefits may not be catastrophic. But you're planning to get most or all of your retirement income from Social Security, a 22% cut could drastically change your financial picture.

That's why it's important to prepare for Social Security cuts. And the best way to do so is to boost your savings.

Of course, boosting savings starts with spending mindfully. Set up a budget to see where your money is going each month, and look for ways to reduce spending.

And don't underestimate the power of modestly boosting your savings rate. If you're currently contributing $200 a month to an IRA or 401(k), increasing that amount to $250 a month could make a big difference over time.

Even if you don't have any money saved for retirement yet, if you prioritize your IRA or 401(k) immediately, you may be able to accumulate a large enough balance to make up for Social Security cuts.

Let's say you're 37, which means your full retirement age for Social Security is 67. That's when you can collect your benefits without a reduction for filing early.

If you save $250 a month between now and then, and your portfolio gives you a yearly 8% return, which is just below the stock market's average, you could end up with about $340,000 by the time your career comes to an end. You can then use that money to supplement your Social Security checks.

Don't panic, but plan for the worst

Social Security has faced a financial crunch before, and lawmakers have never allowed the program to cut benefits. There's a good chance they'll be able to prevent Social Security cuts this time around, too. But that's not something to bank on.

You don't need to panic, but you do need to prepare for Social Security cuts in case they're unavoidable this time around. And if you have a good number of years until you're set to retire, you have a prime opportunity to make up for smaller Social Security checks if that becomes reality.

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