It’s a good idea to save as well as you can for retirement so you’re not so dependent on Social Security once your career comes to an end. But even if you make a strong effort to save well, you may find that it only goes so far.
The reality is that life is expensive. Between paying the mortgage, covering your daycare bills, making your car payments, and putting food on the table, there may only be so much money left to put into your 401(k).
For this reason, you may end up pretty reliant on Social Security once you retire, even if you manage to kick off your senior years with some amount of savings. And that makes the idea of Social Security not being around pretty scary.
A lot of people today are worried about Social Security running out of money and stopping benefit payments completely. But there’s actually no reason to be concerned about that scenario.
Why Social Security can’t run out of money
If you’re convinced that Social Security is running out of money, you’re in good company. It’s a big misconception that Social Security can run out of money, and for your peace of mind, it’s important to understand why that simply cannot happen.
Social Security gets the majority of its revenue from taxing workers’ wages. This means that as long as there’s a workforce, the program can continue to get funded.
So then what are those rumors about? Here’s what’s actually happening with Social Security.
In the coming years, Social Security expects to continue collecting payroll taxes. However, as the labor force shrinks, it anticipates a shortfall where it won’t have enough money to keep up with its benefit obligations in full.
Social Security can use the money in its trust funds to make up the difference. However, once those trust funds are depleted, the program may be forced to cut benefits broadly.
To be clear, benefit cuts are not a given. Lawmakers may be able to find a way around them. It’s important to understand, though, that benefit cuts are the worst-case scenario right now — not Social Security going away completely.
How to prepare for retirement when Social Security’s future is uncertain
By now, you’re hopefully reassured that you can expect Social Security to pay you something in retirement. With any luck, it’ll be the majority of your monthly benefits, if not those benefits in their entirety.
However, there’s something else you should know about Social Security. Even if benefits aren’t cut, they’ll only replace about 40% of your pre-retirement wages if you’re an average earner.
Living on just 40% of your former paycheck could be a struggle. For this reason, it’s important to do your best to save as much as you can.
We talked earlier about how hard that is. But here are a few ways to carve out some extra retirement savings:
- Claim your full employer match in your 401(k)
- Save your raise every year, or a portion of it, before you get used to the extra money
- Cut back on expenses modestly, such as canceling streaming services or subscriptions you don’t use often
- Work a side job for extra cash and earmark it for long-term savings
The good news is that Social Security can’t run out of money, so that’s not something to stress about. But it’s still a good idea to set yourself up to have income outside of Social Security in retirement. The better you’re able to save, the more options you give yourself later in life.
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