In Your 40s? What You Need to Know About Social Security Benefit Cuts.

If you're in your 40s, Social Security may be something you don't think about too often. In reality, though, those benefits could end up playing a big role in your retirement income. And that makes the program's current financial woes a big problem for you.

In the coming years, Social Security expects to owe more in benefits than it collects in revenue. The reason is that payroll taxes primarily fund the program, but a shrinking labor force, coupled with an uptick in baby boomer retirements, is driving Social Security toward insolvency.

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Social Security is not at risk of going bankrupt. And right now, the worst-case scenario on the table is benefit cuts. But it's important to prepare for that possibility in case lawmakers can't keep Social Security afloat.

What the numbers say today

The Social Security Trustees provided an update on the program's finances earlier this year. In that report, they explained that Social Security's Old-Age and Survivors Insurance (OASI) Trust Fund is expected to run dry by the end of 2032.

Social Security can pay benefits even with the OASI Trust Fund at $0 -- that's where payroll taxes come in. But if Congress doesn't implement changes, Social Security could face a broad 22% cut.

That would clearly be a major problem for retirees living off those benefits. But even if you're a couple of decades away from retirement, the reality is that Social Security cuts could alter your plans. So it's important to be aware that even though Congress has never allowed Social Security to cut benefits before, there's a first time for everything.

Take the opportunity to prepare

The good news about being in your 40s is that you may still have a good number of peak-earning years ahead of you. That gives you a prime opportunity to build savings to make up for potential Social Security cuts.

Let's say you're 45 with a $150,000 IRA balance. If you contribute $600 a month for the next 20 years and your portfolio delivers a yearly 8% return, which is a bit below the stock market's average, you could end up with a little more than $1 million by age 65.

At that point, even if Social Security benefits aren't payable in full, you may be able to withdraw more from your savings than the amount that's missing from your monthly checks.

There's no need to be overly pessimistic about Social Security's future. But it's important to recognize that cuts could happen. The sooner you prepare by boosting your savings, the less of an impact those potential cuts might have on your retirement.

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