How to Prepare for Retirement If You're Worried About Social Security

Katie Brockman, The Motley Fool

Updated Sun, Jul 21, 2019, 6:15 PM

Two-thirds of adults nearing retirement age say they're worried about Social Security benefits running out in their lifetime, according to a survey from the Nationwide Retirement Institute, and 61% say they need to continue working because their benefits alone won't be enough to retire on.

If your savings are falling short, Social Security benefits can help bridge the gap between what you have saved and what you need to cover all your expenses. But the Social Security program may be facing cuts in the future, which means you may not receive as much as you'd planned -- and that makes it tougher to plan for retirement.

Social Security cards with hundred dollar bill

Image source: Getty Images.

The future of Social Security

It's true that the program is facing some financial difficulties. Baby boomers are retiring in droves, and there simply isn't as much money flowing into the system in the form of taxes as there is coming out in the form of benefits.

Since the program began, the Social Security Administration has collected $21.9 trillion in Social Security taxes and paid out $19 trillion in benefits, leaving $2.9 trillion in reserves. Because the program is expected to pay out more in benefits than it's bringing in from taxes, it's dipping into those reserves to avoid cutting benefits. However, those reserves are predicted to run dry by 2035, and the SSA estimates taxes will only be enough to cover around 75% of anticipated benefits. In other words, benefits may be cut by up to 25% if the problem isn't solved by 2035.

To avoid a 25% reduction in benefits, payroll taxes could be increased by about 4%, according to the SSA.While nobody wants to pay more in taxes than they have to, most people don't want to see their Social Security checks slashed, either. It's up to Congress to come up with a solution by 2035.

If you don't want to leave your financial future in the hands of the government, though, it's a good idea to start preparing now for the possibility that you may receive less than you'd hoped in benefits. The good news is that the system is not going to collapse altogether; as long as workers continue to pay their taxes, there will always be at least some money that can be distributed as benefits. But to maximize those benefits in the event of reductions, you'll need to be strategic about when you start claiming.

How to maximize your benefits

A major factor that determines how much you'll receive each month is whether you claim before or after your full retirement age (FRA). If you were born in 1960 or later, your FRA is 67. For those born before that, your FRA is either 66 or 66 and a few months.

The earliest you can claim benefits is age 62, but if you choose to do so, you'll receive less each month than if you'd waited -- up to 30% less if your FRA is 67. Wait until your FRA to claim, and you'll receive the full benefit amount you're theoretically entitled to. If you wait until after your FRA to claim, you'll receive a bonus amount on top of your full amount. If your FRA is 67, you could receive 24% extra by waiting until age 70 to claim. While you can wait until after age 70 to claim, there aren't any financial advantages to doing so; the bonus benefits max out at age 70, so you won't receive any extra money for waiting longer.

One advantage of waiting until age 70 to claim benefits is that it can essentially cancel out any potential cuts. There may be benefit cuts of 25%, but if you're receiving 24% extra each month by delaying benefits, those cuts won't sting so much. On the other hand, if you claim at 62 and receive a 30% reduction, and your benefits are then reduced by another 25%, you won't be left with much.

Another way to protect and maximize your benefits is to increase the amount you're eligible to receive. Your full benefit amount (or the amount you'd receive by claiming at your FRA) is based on an average of your 35 highest-earning working years. If you work a few years longer at the end of your career, those higher-earning years could replace some of your lower-earning years from earlier in your career, thus increasing your benefit amount. That amount may still be subject to cuts in the future, but if your benefits are higher to begin with, the cuts won't be quite so painful.

If you're planning on depending on Social Security benefits for at least a portion of your retirement income, it pays to know how any potential cuts will affect how much you receive. By planning in advance to prepare for these cuts, you can maximize your benefits and ensure your retirement is as enjoyable and financially stable as possible.

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