What happens when social security trust funds run out? | Smart change: personal finance

If you read the latest Social Security Trustee Report, you know that the combined trust funds of the program are expected to run out in 2034. And clearly, that's not great news. But before you begin to panic about your benefits, it is important that you understand the consequences of the depletion of those trust funds.

Social security will not go bankrupt

The most important thing you should know about Social Security trust funds is that they are not the main funding source of the program. Rather, most of the income that Social Security receives comes from payroll taxes.


Now, for the first time in several decades, Social Security is absorbing its trust funds, and it will likely continue to do so for the next 16 years. The reason is that the workers have retired at a relatively fast rate, and we are not getting enough replacement workers to allow the program to receive the amount of money it needs to pay. However, once trust funds run out, Social Security will continue to have access to its primary income stream, which means that, in the worst case, future benefits will be reduced, not eliminated.

How much of a reduction are we talking about? Based on the latest projections, by 2034, recipients could lose 21% of their benefits if Congress does not intervene with a solution. And, obviously, that is a hard blow for those who depend on those benefits to provide the majority of their income. But if you are years away from retirement, you can take steps to compensate for possible benefit cuts that you might face, thus ensuring that you do not end up having financial difficulties.

Need own savings

One The main myth badociated with Social Security is that older people can live on their own benefits. Well, the truth is that they simply can not. Even if the benefits not are reduced in the future, those payments will only replace approximately 40% of the pre-retirement income of the typical worker. Most seniors, however, need more than 80% of their previous earnings to pay bills in retirement. Therefore, if you are still working, you must make savings decisions regardless of what happens to Social Security in the future.

If your employer offers a 401 (k), that is certainly a good place to start. . Currently, you can contribute up to $ 18,500 per year to a 401 (k) if you are under 50, or $ 24,500 if you are 50 or older. This means that if you are 50 years old and do not have a penny at the moment, your 401 (k) up to age 67 will leave you approximately $ 755,000 in retirement savings as long as your investments generate an average annual return of 7% that moment (which is more than feasible with a strategy focused on actions). And that, combined with whatever Social Security ends up paying, could make a pretty comfortable retirement.

Of course, not everyone has the ability to maximize a 401 (k), nor do all workers have access to one. But even if you're only working with an IRA, whose current annual contribution limits are $ 5,500 for workers under 50 and $ 6,500 for people over 50, or a lower savings threshold due to personal circumstances, you can still accumulate a sum considerable if you save consistently for many years. In fact, contributing $ 400 per month for 17 years will leave you with $ 148,000, baduming that same 7% average annual yield. Now, that's not much money, but it could be enough to help fill the gap left by Social Security.

No matter what happens to Social Security, there are two things you should take here: The program is not going bankrupt, and it will not be enough to keep you in retirement, even if the benefits are not cut. And the sooner you start establishing your nest, the greater your chances of covering your expenses as a senior, regardless of what your benefits ultimately will be.

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