In recent months, the jobless rate has declined, dropping to levels that were considerably lower than the levels we saw back in the spring of 2020. But the damage has already been done as far as Social Security is concerned, and so now, its safety net will be depleted a year sooner.
Once those trust funds are out of money, Social Security will only be able to pay 78% of promised benefits to retirees. And that’s a problem.
Right now, Social Security is able to replace about 40% of the average earner’s pre-retirement wages. But most seniors need a good 70% to 80% of their former income to live comfortably in retirement (and yes, there’s wiggle room with those percentages, but for the most part, replacing 40% of previous income won’t cut it for seniors).
If benefits are cut by 22%, Social Security will replace an even smaller percentage of pre-retirement wages. And that could leave seniors without savings in a very precarious financial position.
Unfortunately, there’s not too much current beneficiaries can do to make up for benefit cuts other than look at part-time work and try reducing expenses. But workers who aren’t yet retired do have an opportunity to make up for a future reduction in benefits — namely, by saving diligently for retirement while they can.
Contributing $500 a month to an IRA or 401(k) plan over 30 years will result in a savings balance of about $680,000 if that money is invested at an average annual 8% return during that time. That 8% is a few percentage points below the stock market’s average, and therefore a reasonable return to plug in for those who invest their retirement savings aggressively.
