Home > Personal Finance > I’m Worried Social Security Will Run Out Before I Retire. What Can I Do?

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“Social Security is broken; it’s bankrupt; I’ll never see a dime of what I put into it.”

Chances are if you’re a millennial, a Gen-Xer, and dare I say, even a Baby Boomer, you’ve likely uttered these words, or at the very least you’ve thought about it in passing. These days it’s pretty easy to be a little skeptical about the idea of getting any type of benefit from the Social Security system. What makes it even worse is that if you look at your pay stub, you’ll notice that 6.2% of your income (up to the $118k wage base for 2015) is getting gobbled up by Social Security taxes… and if you’re really observant you’ll notice the 1.45% Medicare tax that you pay on EVERY dollar you make (there currently isn’t a cap for this tax). Talk about pouring salt on a wound.

Unfortunately, it gets worse. If you happen to be one of those entrepreneurial types and run your own business, then you’ll need to pony up the employer half of the taxes, as well. This brings the combined payment to both Social Security and Medicare to 15.3% of your income. YIKES. With current forecasts estimating that the Social Security Trust Fund will be bone dry by 2033, it’s no wonder most people roll their eyes when we bring up the idea of Social Security planning. I mean — who cares, right? We’ll never see a dime of that money.

Despite all of the doom and gloom, I’m here to tell you to take heart, my friends. The death of Social Security has been greatly exaggerated. Though don’t start planning how you are going to spend your money just yet. There are a few things that you Boomers, Gen-Xers and even… gasp… millennials need to know about Social Security.

If the Well Runs Dry

If and/or when the Trust Fund is “exhausted,” it really just means that every dollar that gets put into the Social Security system via payroll taxes will be paid out to claimants. What that means is that there aren’t excess dollars for growth, so it’s basically $1 in and $1 out. Crossing this threshold will trigger a reduction in benefits for those already drawing on the system. The reduction in benefits means that a Social Security participant will likely only receive 77% of their expected payments at that time, but here’s the interesting part. Just by triggering the benefit reduction the Social Security Administration estimates that they would be able to pay out around 70% of promised benefits to future retirees through the rest of the 21st century.

While I’m certain that current retirees aren’t exactly thrilled about the idea of taking a 23% pay cut just so future generations get to participate in Social Security, I’m hopeful getting a heads-up 18 years in advance will give those consumers enough time to plan to make up for the shortfall. For those of you who are still working and saving, the good news is that even though your benefits may be a little bit less than estimated today, it appears the system will still be around for some time to come, so you should probably learn a little about it.

Getting the Most Out of Your Payout

First, and this one is an absolute must, be sure to maximize your Social Security payout. For every year beyond the full retirement age that you delay drawing on your own work history, you can earn 8% in delayed retirement credits. This means that just by delaying your benefit from age 66 to age 70, you get an increase of 32%. This alone can help make up for the haircut you’ll take when the fund is exhausted.

While getting a guaranteed 8% a year seems like a no-brainer, it’s important to realize that maximizing your benefits isn’t always about waiting as long as you can to take them. It is almost always about how you and your spouse coordinate your filings so as to get the biggest bang for your buck. Unfortunately, the odds of the average retiree getting this right aren’t very good. MassMutual recently conducted a survey where it asked 1,500 adults 10 simple true/false questions about Social Security benefits. Only 28% received a passing grade and only one person answered all questions correctly – not very encouraging.

Now I know what you’re thinking: “Who cares? How much of a difference can the way I file really make?” Here is a quick real-world example:

A few months ago, I was working with a client who had spent the prior three months talking to representatives at the local Social Security administration office in addition to doing some Internet research. (This first point usually makes us financial planning types laugh a little since we know that Social Security reps are told not to provide guidance on claiming strategies, but I digress.) Because of this, he felt that he had figured out the best way for him and his wife to file, so we put it to the test. We compared his claiming strategy with an approach that our firm felt would be just a little more optimal. The result surprised even me. Using our approach, we were able to get them an estimated $187K in additional income over the course of their lifetimes. I think we can all agree that $187K isn’t exactly chump change, so the way you file truly does matter.

Delay Your Benefits Responsibly

Second, and this is a pretty big one, Mind the Gap. Many of the retirees who want to postpone drawing benefits to earn delayed retirement credits just can’t afford to. They fail to plan for the income gap that results from the delay of benefits. Because of this, they may be forced to go ahead and draw Social Security early, thus permanently forgoing a much larger benefit amount (remember the $187K). Some go ahead and try to fill the gap by distributing assets from other accounts in a less than ideal way. Both of these scenarios could easily set you up for failure in retirement.

Fortunately, like so many personal financial decisions, a little planning and some minor attention to detail can go a long way. One simple way to do this is to open a separate bank account or brokerage account into which you put a little extra money every month. Someone who puts an extra $100 a month into a brokerage account that grows at a 3% rate for 40 years would have around $90K. (Did you hear that, millennials?) This would give you $22,500 a year, or $1,875/month, for the four-year period (age 66-70) that you are able to earn delayed retirement credits. That’s likely pretty close to what your Social Security benefit would be, so it fills the gap nicely. Also, if you can add a little bit more money as you get older, achieve a little higher rate of return, or leverage some type of income vehicle that maximizes the distributions for you, then you could end up with a much larger balance resulting in larger monthly distributions.

Social Security claiming is definitely a tricky subject, but since we know that the system will likely survive for decades to come, it’s important to try and learn what you can. For those who want to absolutely make sure that they get it right, consider working with a Certified Financial Planner with expertise in Social Security optimization. After all, it’s pretty much a one-shot deal. With few exceptions, once you file you are locked in forever and that’s a mighty long time. So make sure that you do it right.

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  • Connor Macleod

    You forgot to mention something kind of important. If you wait until age 70 to collect social security, it will take, on average, 12 years for you to collect the same total amount that you would have collected had you started at age 62.
    In other words, anybody that doesn’t live to the age of 82 has basically given away part of their benefit by waiting to start their payments. I’ll be collecting at age 62. And if I live past the age of 82, I guess I’ll have to live with the fact that I didn’t get as much in my lifetime as I could have. Of course, by then I will have enjoyed 20 years of payments. And I’m pretty sure the years of 62-82 will be of higher quality than any years following age 82.
    Also, I almost find it comical that in most articles on social security, the experts (you?) simultaneously tell us that social security will be running out (or benefits will be lowered), AND you tell us to not take our benefit as early as we can. I’m a bird in the hand kind of person.

  • Chuck Miller

    I’m a little confused on the SS running out. It seems that the Social Security Trust Fund over the Years was violated by the same Government that now has changed the name from a Benefit to an Entitlement. If it directed some of the billions in wasted “Foreign aid” back into the Fund it raped over the Years, not only would it not run out, but rather, it would give recipients a much needed pay raise. I’ve watched the cost of living triple in the last 5 years while the phony generated “CPI” gives raises of about 1 to 2 percent each year. My purchasing power is decreasing much faster than the projected raises.

    Please, correct Me if I’m wrong.

    Chuck Miller

    • John Fowler

      Hey Chuck,
      There are a lot of people who are upset about how our political leaders have handled the administration of the funds. I won’t comment on whether or not these emotions are well founded as that is above my pay grade as they say. I will however comment regarding the use of CPI as it relates to COLAs (Cost of Living Adjustments).

      Currently, you will receive an automatic COLA adjustment based on the CPI-W 3rd quarter over 3rd quarter annual increases. The CPI-W is made up of 40% housiing, 16% Food & Beverage, and 19% Transporation. “They” are currently experimenting with changing the index to CPI-E (CPI for the Elderly) which gives a much larger weighting to Housing and Medical expense inflation. It may be little consolation now, but just an FYI.

      John Fowler, CFP®

  • Gent

    For your next article, I would like to see you discuss the current state of the SSDI portion of Social Security. Some of us can’t accomplish your scenarios and I think your insight into this “other” situation would be very helpful. What I would like to see is your take on what would happen to a person that had to remain on SSDI versus what would be the situation if they left that role for whatever reason and the economic scenarios involved with each… Thnx, Greg

    • John Fowler

      Hey Greg,
      That sounds like a great idea. I also, had a few teachers that are subject to the Social Security Windfall Elimination Provision and Government Pension Offset rules reach out with questions on how they will be effected. It seems like there is a lot of confusion around Social Security eligibility and claiming strategies so I’ll speak to the editors here and try to get both topics into the rotation. I hope that helps.

      For any other readers out there please don’t hesitate to shoot your questions to me via email or post them here on the board.

      John Fowler, CFP®
      email: john@mscm.net

  • Kellie

    I believe you did a good job explaining the “what is” when it comes to SS and funding. I especially thought the idea for filling in the gap years was helpful. We’re told to try and wait as long as possible to take SS so that the payout will be larger but not many specify a way to do that when you’ve retired and don’t have a paycheck to cover it. Thanks for the article!

    • John Fowler

      Hey Kellie,
      Thanks for the kind words. I’ll be writing articles from time to time and I want to be sure to cover topics that our readers are concerned about. If you or any other readers out there have any questions or topics that you would like to see covered, please feel free to shoot me an email with your idea and I’ll see what I can do to make it happen

      John Fowler, CFP®
      email: john@mscm.net

  • JBlowInColorado

    Unfortunately, John has perpetuated the lie that has been told by Congress since the Social Security program was initiated. The lie that says that your employer pays half of your Social Security. While your employer may actually pay that portion, don’t be deceived by the lie. When your employer hired you, the portion that they have to pay to the government for your Social Security is considered part of your compensation.

    All businesses do this. They consider the entire amount that it costs to have you work for them. Whatever is left after they pay Uncle Sam for your Social Security, Medicare, health insurance premium, plus factor in sick time and vacation, goes in your paycheck. That’s the way it works folks.

    • John Fowler

      Hey JBlowInColorado,
      Thanks for taking the time to comment on my little article here. I am, however, curious as to what lie I’ve perpetuated since I’ve gone through a great deal of effort to ensure that I’ve relayed nothing but fact. You state that it’s a lie that your employer pays half of your Social Security. Well you are partly correct in the fact that you misworded your reply. I never stated that your employer pays half of your Social Security, rather your employer pays half of the required Social Security TAX on your behalf (if you were self-employed, in most cases, paying this half would also be your responsibility). The two are incredibly different things really. Your version implies that there is an account in your name somewhere accumulating all of the dollars that both you and your employer have paid in to the system with the express purpose of paying those dollars out to you once you retire (i.e. like a 401k plan). When in actuality you are merely paying in to a much larger system with the hopes of being able to benefit from the system as you age (the closest corrolary of which is either a life insurance policy or a defined benefit plan, or pension). Pensions go bankrupt and reduce benefits more frequently than one would hope so the corrolary is, unfortunately, apropos.

      I’m not here to argue the pros and cons of social insurance or how to fix the system. I’m here to provide guidance to the average investor on how to work within the system, as it stands right now, and make the most of it. I invite you, or any other readers, to reach out to me with any questions you may have re: Social Security Optimization and perhaps we can all weather this storm together.

      John Fowler, CFP®
      email: john@mscm.net

  • rbrinkman

    why is something all working people paying for going bankrupt. It was supposedly set aside by our Government that promissed not to touch it, but guess what they did. Why is we never here that welfare is going broke, politicians keeps it going so they can get re-elected. Its called buying votes. why is it politicians don’t have to pay into it like the working class people. Oh thats right they retire with their full salariy. who allows these people to run over the people that elect them. they make their own rules and the h_ll with the ones working to pay the sorry bunch.

    • John Fowler

      Hey rbrinkman,
      I certainly understand your frustration. I hear your statement of,”Why is it that we never hear about welfare going bankrupt” quite frequently. Unfortunately, as a financial planner we don’t have the luxury of debating the legitamacy or ridiculousness of federal, tax, or estate laws. We simply try to help our clients, and readers, navigate the environment that we find ourselves in. If you, or any other readers, have a question about how to successfully navigate the quagmire of crazy rules and regulations that we find ourselves in today.

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