For those Americans who plan to retire soon, your post-work financial plan might need to look very different from what you have envisioned.
While retirees got the biggest Social Security cost-of-living adjustment (COLA) since 1981 this year, experts have concerns the boost could potentially hasten the program’s insolvency date — and that boost still may not be enough for Americans who rely on it.
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The main fund that supports Social Security is projected to run low by 2035, according to the latest trustees report — but it could drain even faster now thanks to the higher benefit payments.
“Social Security’s in trouble; we are in trouble. And the only people that are going to save us, is us,” financial expert and podcast host Suze Orman told Moneywise in an October 2022 interview.
Even if there is a bumpy road ahead for Social Security and the U.S. economy, Orman says you still have ways to take control and keep your golden years golden.
Social Security is set to run low by 2035
The Social Security Old-Age and Survivors Insurance Trust Fund has been drying up, partially due to the large drop in birth rates over the last few decades. Less people means less tax revenue to contribute to the fund.
High unemployment during an economic downturn could also “cause a significant worsening in the finances of the Social Security Trust Fund,” Mary Johnson told Moneywise in October. Johnson is the Social Security and Medicare policy analyst at advocacy group The Senior Citizens League (TSCL).
Once the fund’s reserves are exhausted, you’ll only receive about 77% of your expected benefits unless Congress steps in.
One option to make up for the shortfall would be to increase taxpayer revenue, says the Center on Budget and Policy Priorities.
While some proposals have reportedly been discussed — including raising payroll taxes on the rich to fund Social Security —, it is unclear what measures President Joe Biden will ultimately take when he releases his budget this month.
In a speech last month, President Joe Biden promised to “defend and strengthen the Social Security and Medicare system”.
“If anyone tries to cut Social Security, we’re going to stop it. If anyone tries to cut Medicare, we’re going to stop it.
Orman suggested the government could consider pushing back the minimum age at which you can receive your full Social Security benefits as well. This age is currently 66 or 67, depending on when you were born.
Inflation’s impact on savings
Meanwhile, inflation is still rampant and putting a dent in people’s retirement funds.
In fact, Americans say they’ll need $1.25 million in savings to comfortably retire, which is 20% more than they thought they’d need last year. Their average retirement savings have dropped 11% from 2021 as well.
“[The government is] seeing savings account levels go down, seeing debt go up, seeing retirement accounts being withdrawn from — and seeing the potential of a problem down the road,” says Orman.
Orman worries the current economic conditions are setting the country up to become a “welfare state.”
“Is the government going to have to take care of most of the people? Because they won’t have any money. So how do they solve that problem right now, before it goes in that direction?”
Credit card debt is surging at its fastest year-over-year rate in over 20 years, and it’s becoming even more expensive to borrow with recent rate hikes.
Despite this year’s COLA being the biggest in four decades, it still may not be enough to counter rapidly rising prices.
A February survey from the The Senior Citizens League (TSCL) found that 54% of older consumers remain unconvinced that the 8.7% COLA will keep pace with rising costs this year.
And their fears are not unfounded. New analysis by Johnson indicates that during the period from the start of the COVID-19 pandemic in 2020 through to December 2022, Social Security benefits have fallen short of COLAs by $1,054 on average.
She has also previously stated that if the economy turns to deflation in the coming year, there’s also a possibility there will be no COLA payable in 2024.
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Preparing for retirement
Inflation has cooled to 6.4%, but it is still keeping the cost of goods and services uncomfortably high for many Americans — but Orman warns not to tap into your retirement accounts or investments to deal with the expenses.
“That is for when you retire. We’re living longer right now. So that retirement account has to be bigger.”
She says it is essential that you have an emergency savings account as a buffer for unexpected expenses instead. Most experts generally advise that you set aside three to six months’ worth of living expenses.
Even after you retire, it’s crucial to have substantial savings in place. Experts told CNBC that a retiree should have one to three years worth of expenses tucked away, depending on their monthly expenses and income.
Johnson noted back in September that over half of older households have no savings in place and rely mainly on their Social Security benefits.
She says it’s also important to budget for your medical care — although Medicare premiums only dropped $5 a month to $164.90 this year.
Look into your medical coverage and out-of-pocket maximums and determine exactly how much you need in savings for a worst-case scenario.
Orman echoed this sentiment in a 2022 episode of her podcast. “So for those of you who are retired …you need to start cutting expenses right here and right now.”
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.