Should You Delist Social Security for Your Retirement?

JHere’s a world of misinformation surrounding Social Security, and sometimes it can be hard to know what to believe. For example, you may have heard that Social Security is in serious financial trouble and therefore future benefits are precarious. As such, you may be wondering if it’s time to phase out Social Security as a source of retirement income. Here’s what you need to know.

Service reductions are possible

In years to come, Social Security expects to owe more money in benefits than it collects in revenue. The reason for this is that baby boomers are expected to leave the labor market in the short term and an insufficient number of workers will come to replace them.

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Social Security derives most of its financing from social charges. This is why this massive outflow of baby boomers is so problematic for its finances. And although the program has trust funds it can draw money to meet scheduled benefits, once these trust funds are depleted benefit reductions may be considered.

Unfortunately, the program’s trust funds could run out in about 10 years if recent projections are correct. This would make benefit reductions not a distant possibility, but a short-term possibility.

Will social security disappear?

While future retirees may face cuts to Social Security benefits, it’s far from a complete drying up of funding for the program. The latter scenario is not a concern at this time, and so there is no need to assume that Social Security will not pay you any money in retirement.

That said, even if benefits aren’t reduced, the money you receive from Social Security will usually only be enough to replace about 40% of your pre-retirement salary — and that’s if you’re on an average income. If you have a higher income, these benefits will replace your income even less.

That’s why building up a retirement nest egg is so important — not because Social Security is going away, but because even if those benefits aren’t cut, you’ll still need outside income to get by. once you stop working. And if benefits are actually reduced, you will need even more independent savings.

The good news, however, is that if retirement is many years away, you have plenty of opportunities to build a solid estate. Saving $400 a month in an IRA or 401(k) plan, for example, will leave you with more than $1.2 million after 40 years if your invested savings generate an average annual return of 8%, which is slightly lower than the stock market average.

Know what you are facing

There’s no reason to think that Social Security won’t pay you anything after you retire. But should you have another source of income besides this one? Absoutely. This remains true whether or not benefits are actually reduced.

And to be clear, benefit cuts are a scenario lawmakers want to avoid, so they can find a solution to the program’s financial woes by the time its trust funds run out. What this solution will entail, however, is anyone’s guess.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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