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Even Current Retirees May Not Get Their Full Social Security

Social Security's Trustees recently released their 2017 report on the health of the program and its trust funds. Just like last year's report, this year's sounds the alarm that Social Security's trust funds are on track to run out of money by 2034, just 17 short years from now. If nothing changes, when the trust funds empty, benefits will need to be cut by around 23% in order to match expenses with income.

Unfortunately, the inevitable ticking of the clock, with no action being taken to shore up the program, means that you have one less year to invest to cover the gap you'll face if the trust funds do empty. It also means that many current retirees are at risk of seeing their benefits cut near the end of their lives.

Image source: Getty Images.

Which seniors are at risk?

According to actuarial tables, men aged 65 and women aged 68 have, on average, 17 years of life ahead of them. The most common age to start receiving retiree Social Security benefits is 62. Combined with current demographic trends, that means that millions of current seniors, many of whom are already collecting benefits, will likely still be alive when the trust funds are expected to empty.

If you're active and healthy and longevity runs in your family, you may very well live longer than the averages indicated by the actuarial tables. That could put you at risk of seeing your benefits cut, even if you're a bit above those ages today. If you're a male younger than 65 or a female younger than 68, the odds are even more in your favor of still being around when Social Security's trust funds hit that expiration date.

How big an impact will it be?

Image source: Getty Images.

According to Social Security, the average retiree receives about $1,367.58 in benefits each month. Twenty-three percent of that amount is $314.54, which represents the amount likely at risk as the trust funds empty. Social Security benefits are indexed to inflation. If you assume inflation will be around its long-run historical rate in the neighborhood of 3%, that $314.54 at risk will be around $519.89 per month, or about $6,239 per year, in 2034.

That's a fairly big chunk of income to lose, particularly if -- like the majority of retirees -- you're dependent on that Social Security check for over half your income. If there's a silver lining to that cloud, though, it's this: You still have 17 years to invest to build a nest egg to cover that gap. If you get started now, you have a strong chance of saving up enough in investments to cover the gap that you're at risk of facing in the event the trust funds empty.

How can you make up that gap?

To cover $6,239 a year in inflation-adjusted income in 2034, you'll need as much as $155,975 saved up by that point -- less if you expect to be near the end of your retirement by that point. That number comes from a retirement planning strategy known as "the 4% rule." By that rule, you can:

  • Start with a diversified and balanced portfolio,
  • Regularly rebalance your accounts to maintain that diversification and balance,
  • Withdraw 4% of your retirement nest egg in the first year of your retirement, and
  • Increase your withdrawals by inflation every year after that.

By that approach, your money has an incredibly strong chance of lasting throughout a 30-year retirement. The figure of $155,975 is 25 times that $6,239 annual gap, which covers the 4% rule and makes it a reasonable target for people who will be either early in their retirement or not quite retired by 2034.

The table below shows how much you need to invest each month to reach that target, based on when you get started and what rate of return you earn along the way:

Starting Year

10% Annual Returns

8% Annual Returns

6% Annual Returns

4% Annual Returns

2017

$293.04

$361.22

$441.57

$535.09

2019

$376.32

$450.75

$536.33

$633.81

2021

$490.56

$571.50

$662.46

$763.94

2023

$653.00

$740.69

$837.12

$942.61

2025

$896.13

$990.76

$1,092.72

$1,202.20

Chart by author.

Over the long run, the stock market has delivered annualized returns near that 10% level, though it does not bring with it any guarantees of future returns. If you don't think that level of returns is feasible over the next 17 years, you can invest as though you'll receive a lower rate. If it does wind up outperforming those lowered expectations, you'll simply reach your target that much sooner -- or wind up with an even bigger nest egg for your retirement.

Now is your best time to get started

Image source: Getty Images.

As the table above shows, no matter what rate of return you earn on your investing, the sooner you get started, the less you have to save each month to reach your goal. If you think it's hard coming up with a few hundred dollars each month to invest now, just wait until 2034 comes around when Social Security benefits might get cut by 23%.

If you don't have plans in place by then, it may be too late for you to make up the gap. So get started now, and improve your chances of making up for the money Social Security may not provide.

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Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.