Can Social Security Actually Go Broke? Here's the Real Story All Retirees Should Know.

It’s important to dispel this giant myth.

Not long ago, I was helping a friend decide whether they should invest for retirement in a traditional IRA versus the Roth version. As we discussed the tax benefits of each account, my friend made a comment along the lines of, “Well, I’d better up my savings game either way, since I can’t count on Social Security to pay me a dime.”

On the one hand, I was kind of glad he said that. Far too many people neglect their retirement savings, thinking they can fall back on Social Security later in life instead.

On the other, I felt compelled to clear up a big misconception about Social Security — that it’s going broke. And I’m here to share what I told that friend so you can plan for your retirement accordingly, and so current retirees don’t have to whip themselves into a panic.

Social Security cards.

Image source: Getty Images.

The truth about the future of Social Security

Social Security’s most recent Trustees Report painted a somewhat bleak picture. The program’s combined trust funds are expected to run dry in 2035. Benefit cuts could easily be on the table once that happens, which could be catastrophic to the millions of seniors who receive Social Security today.

But nowhere in that report does it state that Social Security is at risk of going broke completely. And in fact, that’s really not possible due to the way Social Security is funded.

Social Security gets the bulk of its revenue from payroll taxes. In the coming years, that revenue stream is projected to shrink as baby boomers stage a mass workforce exodus — something they’ve more than earned.

But as long as we have an active labor force, Social Security will continue to receive funding. And that’s the primary reason it’s silly to think that benefits are going away completely. So if that’s a concern of yours, whether as a current recipient or a future one, rest assured that the worst-case scenario on the table right now is benefit cuts. And even that’s not a given.

Lawmakers recognize that slashing Social Security would cause a crisis among retirees who get the bulk of their income from the program. That’s something they’re apt to want to avoid.

This also isn’t the first time that Social Security has faced benefit cuts, and in the past, lawmakers have always come through to prevent them. But again, there’s a world of a difference between Social Security cuts and Social Security going away entirely.

How Social Security should factor into your retirement

Even though Social Security isn’t at risk of completely going broke, it’s best to be realistic about its role in your retirement. I’ll tell you what I tell my friends point-blank: You do not want Social Security to be your only source of retirement income. Even without benefit cuts, Social Security will only replace about 40% of your paycheck if you earn a modest wage. Most retirees can’t live well on a 60% pay cut.

Along these lines, Social Security shouldn’t even be your primary source of retirement income if you can help it. Rather, most of your income should come from savings — or a combination of savings and an employer pension, if you’re fortunate enough to have one.

What you should ideally be using Social Security for in retirement is supplemental income — money to pay for leisure, travel, and expenses along those lines. But for that to be possible, you need to save a decent chunk of money on your own during your career. That’s more than possible, though, even if you’ve been working for quite some time and have yet to fund a retirement account.

Let’s say you begin saving $600 a month for your senior years and continue to do so for the next 25 years. If you invest that money at an 8% average annual return, which is a bit below the stock market’s average, you’ll have about $526,000 to your name come retirement. Make it $800 a month, and you’re looking at roughly a $702,000 nest egg.

Of course, if you have more time between now and retirement, even better. Saving just $400 a month at an 8% return over 40 years could leave you with over $1.2 million.

Either way, do your best to not become too reliant on Social Security in retirement. But also, don’t write off those benefits completely. It’s more than fair to factor some Social Security into your retirement finances. In a worst-case scenario, though, it won’t be the complete monthly benefit you’re entitled to.

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