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By 2034, incoming income will be enough to pay about 76% of planned Social Security benefits, predicts a 2020 report from Social Security Administration trustees.
Considering this, how could the different generations plan for this? Should they expect a 24% drop in their expected benefit? Shouldn’t they factor Social Security benefits into their retirement income plan at all? Or could they do something else.
“While I think it is much more likely that a combination of reforms will eliminate the need for cuts of the magnitude suggested by the Directors’ report, people should be aware of the impact that a reduction would have on their lives. overall financial picture, ”said Joe Elsasser, a certified financial planner and president of Covisum.
What are some of these reforms? Tax increases, benefit cuts or a combination of the two are the reforms often mentioned. But to date, lawmakers seem little or not interested in tackling the upcoming deficit between incoming income and expected benefits.
What to do then? “The implications with Social Security solvency tend to fall along generational lines,” says Marcia Mantell, director at Mantell Retirement Consulting.
She agrees with Elsasser that social security beneficiaries and potential beneficiaries should consider the following actions:
Baby boomers: in the game
Social Security benefit estimates for those born 1946 to 1964 are expected to be on target and are unlikely to be reduced if Congress fails to put in place a solution to consolidate the reserve account within of the global trust fund, or does not increase payroll taxes to support commitments made to these retirees, Mantell says.
Elsasser agrees but suggests taking precautionary measures. “Baby boomers should plan for benefits as they are intended, but perform a stress test for reduced benefits,” he says. “Historically, benefit reductions have been phased in. “
For example, the last solvency crisis of this magnitude occurred in 1983. “And some of the reforms that were put in place are still underway today, such as raising the full retirement age. from 65 to 67 ”, notes Elsasser.
Stress testing, according to Elsasser, allows you to practice what you would change in your plan if the full cut materializes. “If the cuts to your plan are too painful to take if they materialize, then make small changes now and monitor the situation,” he says. “Small cuts in your lifestyle sooner will hurt less than bigger ones later.”
Covisum has a benefit reduction calculator that allows consumers to identify the impact of benefit reductions on their equilibrium age.
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Generation X: Plan for a 10% reduction
If you were born between 1965 and 1980, planning for your retirement income becomes more important than ever, warns Mantell.
Elsasser recommends planning a 10% reduction in your Social Security benefits and making a retirement projection that includes a reduced Social Security amount to balance your lifestyle today with the lifestyle you would like to live in. retirement.
The good news about this bad news? “For the 65 million of you between the ages of 41 and 56, you are in your peak earning years,” says Mantell. And that means you can and will increase your personal savings.
“You will be well served to rethink, rebudget and redesign your spending and your savings strategy in case Social Security produces less income than currently expected,” she warns. “You have time on your side, and every $ 1,000 or $ 2,000 or $ 5,000 you can spend now will increase your income for retirement and balance any trade-offs you may have to make.”
And what is the worst-case scenario if you increase your savings and social security benefits are reduced? “You end up with more than you need,” says Elsasser.
Generation Z and millennials: too early to tell – or to worry
Experts say it’s too early for Millennials and Gen Z to worry about reduced Social Security benefits.
“You are too young to guess for sure how Social Security will pay the benefits,” Mantell notes. “Half of you don’t even have your 40 eligibility credits yet. Thus, your attention will be well served to be on you.
Elsasser shares this point of view: “While it is important for everyone, especially if you are under 40, you need to continue to focus on improving your skills, education and training in order to to maximize your earning potential during your highest earning years, ”he said. advises. “It’s also important to regularly save on vehicles that you won’t touch until you retire. At a minimum, make sure you take advantage of any company matches or incentives.
The best of cases
All this planning for a potential reduction in benefits could be a lot of ado about nothing, according to Michael Finke, a professor at the American College of Financial Services.
“I don’t know of any social security expert who thinks Congress will allow for a significant reduction in beneficiaries,” he said. “Politicians face a dead end where making changes today to strengthen social security is painful, as it will mean either higher taxes or lower benefits, but the alternative to no change is worse – having a large number of voters see a cut in their retirement income.
And that, he predicts, will prompt Congress to raise payroll taxes, raise the age of demand, or change the inflation adjustment.
This article originally appeared on USA TODAY: Social Security Cuts: What Can You Expect Based on Your Age?
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