Social Security Advice: One Key Takeaway for All Retirees

Millions of older adults rely heavily on Social Security in retirement. Around 60% of current retirees say their benefits are a major source of income, according to a 2024 Gallup poll, while an additional 28% say it's a minor income source.

While there's no harm in relying on Social Security to some extent, if I could give all Americans one piece of advice about Social Security, it's this: Have a backup plan.

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The future of Social Security

First, it's essential to note that Social Security is unlikely to disappear entirely. Many people are concerned about the program going bankrupt. However, while benefit cuts could be on the horizon, the program itself should still be a reliable source of income to some degree.

Social Security is funded primarily through payroll taxes. Today's workers pay into the program through taxes, and that money is funneled to current retirees and other beneficiaries. But in recent years, that income hasn't been enough to cover all the benefits that need to be paid out.

As a result, the Social Security Administration (SSA) has tapped its two trust funds to continue paying benefits in full. According to the latest projections from the SSA Board of Trustees, which were released in May 2024, those trust funds will likely run out by 2035.

Now, this doesn't mean that Social Security itself is running out of money. Again, as long as workers keep paying payroll taxes, retirees will always receive some form of benefits. But unless lawmakers find some sort of solution in the next decade, benefit cuts could be a possibility.

Other factors complicating Social Security

The SSA's latest trust fund projections date back over a year. A lot has changed since then, and there could be more potential changes coming that could impact Social Security.

For example, President Trump has previously proposed eliminating income tax on Social Security benefits. While that could increase retirees' income in the short term, it would also mean there's less cash for the SSA to fund benefits.

Tax cuts, in general, could also hurt Social Security. If the SSA has to take more than it had planned from the trust funds, those reserves could run out even sooner than 2035. Also, with less money coming in from taxes, the subsequent benefit cuts could be even more severe than expected.

How to plan right now

To be clear, benefit cuts are not a guarantee at this point. Lawmakers still have a few more years before the trust funds run out, and they could come up with a solution to protect the program. But when your retirement is on the line, it may be wise to avoid putting your financial future in the hands of Congress.

If you still have some time before retirement, it could be smart to find ways to reduce your dependence on Social Security. That could mean simply saving more in your 401(k) or IRA, or perhaps picking up a side hustle or a source of passive income.

Investing in dividend stocks or ETFs can also be a smart strategy to build your investment portfolio while also generating a source of passive retirement income. Investing even $200 per month can add up to more than $137,000 after 20 years, assuming you're earning a 10% average annual return on your investment.

No matter your approach, diversifying your income so that you're not completely dependent on Social Security is a wise move right now. While the program isn't going away entirely, it doesn't hurt to be prepared just in case benefit cuts are on the horizon.

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