Social Security benefits are on shaky ground and the coronavirus recession only makes things worse. Can you protect yourself from whatever cutbacks the Social Security Administration might be forced to make?
There are strategies you can adopt that will boost your income, relieve your concern and reduce your vulnerability to the prospect of cutbacks to Social Security benefits, according to retirement planning experts queried by Investor’s Business Daily.
Planning is wise. The situation could be dire, especially given the economy’s weakened state.
Social Security Benefits: Cut Back To 76% Of Normal?
In their annual report released in April, the Board of Trustees say their coffers will have enough money to keep paying scheduled benefits until 2034. After that, cuts to benefits may be needed.
Without a reserve fund to tap, they will be forced to rely on just payroll taxes in more of a pay-as-you-go arrangement. Social Security, trustees warn, may need to slash benefits to 76% of normal.
What can you do to cope?
Strategy #1 For Coping With Social Security Cutbacks: Save More
First and foremost, there is the king of time-tested remedies: Save more.
But the key to making that remedy more tolerable is to increase your savings in very small increments.
Suppose you are 45 years old and save only 6% of your pay. Assuming a commonplace scenario — you’ve got $174,800 socked away, your savings grow 7% a year, your employer pays a company match of 25% on the first 6% of your pay — by age 72, your nest egg would total $1.467 million, according to the Bankrate.com 401(k) calculator.
But if you boost that 6% savings rate by one percentage point a year until you’re kicking in more than 15% of your pay annually, including company match — a strategy recommended by Fidelity Investments’ 401(k) savings expert Katie Taylor — by age 72 your nest egg balance would be $1.76 million.
That’s an extra $300,000 in retirement savings.
That can let you breathe a lot easier about cutbacks to Social Security benefits.
Strategy #2: Know The Risk
Social Security’s dwindling resources may not impact all retirees equally. “People in their sixties or older probably won’t be affected,” said Ed Slott, founder of IRAHelp.com. “When Congress finally gets around to doing something about this, they aren’t likely to take benefits away from people who are already collecting or close to collecting. Politicians who voted for that wouldn’t last two minutes in office. People in their sixties and older are a voting bloc that actually votes.”
What about younger Americans? “People who are now in their forties and fifties are likely to be impacted by whatever Congress eventually does,” Slott said.
Kimberly Foss, founder and president of Empyrion Wealth Management, in Roseville, Calif., says retirees should expect something like what Congress did in the 1980s, the last time Social Security reserves were threatened with depletion.
“Congress reacted by gradually raising the full retirement age from 65 to 67 and it began to tax Social Security benefits based on income levels,” she said. “I believe they’re likely to do something similar in the future.”
Strategy #3: Boost Your Tax-Free Income
One standard defense against cutbacks to Social Security benefits is to cut your spending. Our experts explain how to do that without lowering your standard of living — without depriving yourself of the pleasure of buying what you want.
How? “One way to cut spending is to cut your taxes,” Slott said.
Foss elaborates: In your taxable, nonretirement savings accounts, include high quality municipal bonds and bond funds. Their income is generally immune from regular federal income taxes and from your home state’s income tax. That’s especially valuable if you will be in a high tax bracket in retirement.
But the finances of many jurisdictions are being weakened by reduced tax revenues due to the coronavirus pandemic. That’s why Foss is advising taxpayers to stick to high-quality bonds and funds. “I’d definitely lean more toward highly rated issues or high-quality muni funds,” Foss said. “Right now I wouldn’t go below A rated bonds or funds. And I prefer AA and AAA rated.”
Remember: Muni-bond income counts as part of the IRS calculation of how much of your Social Security benefits are taxable.
Strategy #4: Run The Roth Account Defense
Roth IRAs and Roth 401(k)s are another tool for lowering your taxes. You can always withdraw contributions tax-free from a Roth retirement savings account — unless the rules are changed.
You can withdraw earnings tax-free once you reach age 59-1/2 and you’ve had your account at least five years.
“For those who anticipate being in a higher tax bracket at retirement, converting traditional IRAs and 401(k)s to Roth accounts is often a smart move,” Foss said.
Strategy #5: Delay The Start Of Social Security Benefits
If you can afford to wait, delay your start of Social Security benefits until well after age 62.
Why? Age 62 is currently the earliest that you are allowed to start receiving benefits.
But, under today’s rules, if you wait until what the Social Security Administration calls your full retirement age (FRA), your benefits will jump by up to 30%.
If you were born in 1958 and just turned 62, your FRA is age 66 and eight months.
But full retirement age is not the same as maximum retirement benefits age. That occurs once you reach age 70. Your monthly benefits grow between FRA and age 70. But they don’t grow any more once you hit the big 7-0.
So, waiting until age 70 can add well over $1,000 to your monthly benefit.
Are You Filthy Rich?
There’s another advantage to delaying the start of Social Security benefits. Unless you’re filthy rich and have zero money pressure, delaying retirement requires adjusting your retirement planning.
You’ll work longer. You’ll also be able to postpone everything from downsizing your housing to relying on Medicare. Your nest egg will need to last fewer years in retirement.
How is any of that good? Once Congress gets around to shoring up Social Security, the remedy could very well involve pushing back eligibility ages for benefits. If you do it to yourself first and build it into your financial game plan, it will come as less, if any, of a financial shock.
And you’ll still be getting a larger monthly benefit.
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