Are you betting on Social Security to stay afloat in retirement? You will have to rethink that plan. While Social Security typically replaces about 40% of your earned income, which is often not enough for many to survive comfortably, there is a good chance that you will get even less. Here are three factors that could degrade your Social Security benefit and what you can do about it.
1. Social Security benefits may be reduced by 2035
According to the latest projections, Social Security asset reserves will be depleted in 2035. Those asset reserves cover the gap between Social Security income collected through payroll taxes and funds paid to beneficiaries. If no changes are made to the Social Security system, the deficit should be addressed by reducing benefits, by around 24%.
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To put this in perspective, the average retired worker in 2020 receives approximately $ 1,510 per month in Social Security benefits. A 24% reduction equates to a $ 360 monthly salary cut, reducing that retiree’s monthly income to approximately $ 1,150.
2. Social security does not keep pace with healthcare inflation
Since 1975, Social Security benefits have been adjusted each year according to the Consumer Price Index for Salaried Workers and Administrative Workers (CPI-W). These adjustments are known as COLA, and are designed to prevent Social Security earnings from losing purchasing power over time due to inflation. The index name suggests the problem with this system. Retirees are not salaried or office workers, and the CPI-W does not adequately reflect the price inflation that most affects older people.
A recent study by The Senior Citizen’s League looked at spending on retirement homes and how that spending relates to the purchasing power of Social Security benefits. The study concluded that between January 2000 and January 2020, COLAs increased Social Security benefits by 53%. But in that same time period, older people experienced 99.3% inflation on the goods and services they buy most often. The big inflationary culprit is healthcare costs, including prescription drugs, Medicare Part B premiums, Medigap premiums, copays, and coinsurance.
The Centers for Medicare and Medicaid Services predict that health care prices will grow 2.5% annually through 2027. That rate is more than double the inflation experienced between 2014 and 2017. If the COLA formula is not renewed, Insurance benefits Social will continue to lose purchasing power.
3. You can retire earlier than expected
A 2019 survey by the Employee Benefit Research Institute found that 4 in 10 seniors retired earlier than they had planned. Those accelerated retirements were mainly due to health problems or changes within the employer.
Being pushed into retirement earlier than planned will affect your Social Security benefit, and not in a good way. You can claim Social Security as soon as you’re 62, but you don’t qualify for your full benefit until full retirement age (FRA). FRA is based on your year of birth, but is somewhere between 66 and 67. When you claim Social Security before FRA, your benefit is reduced by up to 30%.
Your retirement action plan
Your Social Security benefit is under pressure, and not just because asset reserves are declining. Health care inflation is outpacing Social Security COLAs, and there is a chance that you may have to get a smaller benefit for an unplanned early retirement. If you are affected by these three factors and do not have savings to supplement your income, you are facing a rather sad lifestyle in retirement.
The best course of action now is to put more effort into your retirement savings. Look at your home budget and find ways to cut expenses. Then funnel those savings into your retirement account. If you have access to a 401 (k), make sure you’re maximizing your employer’s match. And take advantage of contributions to catch up if you’re 50 or older. In 2020, catch-up contributions add $ 6,500 to your 401 (k) contribution limit, bringing the total to $ 26,000. You can also contribute $ 7,000 to an IRA, or $ 6,000 if you are under the age of 50. Your contributions to the IRA may not be tax deductible if you are also contributing to a 401 (k), but taxes will be deferred on your earnings.
You can also brainstorm ways to develop other sources of retirement income. If you own your home, you could generate income through short or long term room rental. If you have good credit, you could finance a rental property with positive cash flow. It could even start a lateral hustle.
The point is, don’t just rely on Social Security to finance your retirement. Your benefit can keep you out of poverty, if you’re lucky. But it will definitely not be compatible with your current lifestyle.
