When It Comes to Social Security, It’s Best to Plan for the Worst

You’ll often hear that having a positive attitude could turn a tough situation into a manageable one. And there are definitely scenarios in life where that makes sense.

But when it comes to Social Security, it might actually help to take a negative approach to your future benefits. Doing so might help you avoid a financial shock when you’re older.

Social Security is on shaky ground

There are rumors circulating that Social Security is rapidly running out of money, to the point where benefits won’t be payable in the future. Well, that’s false.

Image source: Getty Images.

What is happening, however, is that the program in the coming years expects to owe more in benefits than it collects in revenue. Thankfully, it has trust funds it can tap to make up for that shortfall. But once those trust funds run dry, benefit cuts will be a real possibility.

Meanwhile, Social Security’s Trustees anticipate that those trust funds will be empty by 2035. Once that happens, recipients may be looking at reduced benefits.

And that’s why it actually pays to lower your expectations with regard to Social Security and assume that your retirement benefits will be a lot lower than the payments you’d normally be entitled to. If you take that approach and save enough to make up the difference, you might avoid a serious financial crunch once your time in the workforce comes to an end.

In fact, let’s imagine retirement is 30 years away but you’ve yet to put money into an IRA or 401(k) plan. If you start saving $500 a month now and invest your savings at an average annual 8% return (which is a bit below the stock market’s average), you’ll end up with a nest-egg balance of roughly $680,000. That could make a huge difference if your Social Security benefits are reduced by 20%.

It’s OK to be pessimistic

Maintaining a positive attitude is a good way to live. But in the context of Social Security, being pessimistic also means being realistic. And that’s important because if you don’t have a solid handle on what the program might pay you, you could end up with a serious personal-income shortfall down the line.

The reality is that lawmakers might manage to step in with a fix to prevent Social Security cuts. But we can’t bank on that happening, especially since most of the solutions proposed to date come with their own distinct drawbacks.

Take raising the wage cap for Social Security tax purposes. Doing so could easily pump more money into the program, to the point where benefit cuts may be completely avoidable. But higher earners are unlikely to take kindly to a greater tax burden, and that’s something lawmakers are apt to consider in the course of their decision-making.

As such, your best bet is to assume that you won’t get your full retirement benefits and save up enough money to help ensure that you don’t struggle because of that. Social Security is clearly facing financial difficulties, but if you play your cards right, they won’t have to mess up your retirement.

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