Social Security benefits are projected to be cut by 2035. Learn how to grow your nest egg by saving and investing to unlock a financially secure retirement.
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Social Security provides a vital safety net for millions of Americans who might otherwise fall below the poverty line. Still, it was never meant to be a primary source of income for retirees. Longer life expectancy and increased health care costs have significantly strained the program's finances.
The 2023 Social Security and Medicare Trustees annual report projects that the program's trust fund reserves will be depleted by 2035. That doesn't mean there wouldn't be money to pay out Social Security benefits. But if officials don't find a way to get more money into the system, substantial benefit cuts for retirees across the board could result.
"If Congress doesn't make any big changes, we will only be able to cover about 83% of Social Security benefits," said Emily Millsap, a CFP, manager and financial planner from Avantax Wealth Management. "It's not that Social Security will disappear completely, but rather, the surplus bucket we rely on is at risk."
As of 2024, more than 68 million retirees depend on their monthly Social Security checks as a major source of income. The Social Security Trustees Report found that out of the group of retirees 65 and older, 12% of men and 15% of women relied on Social Security for 90% or more of their income.
The average Social Security check for a retired worker is only $1,907 per month, according to the Social Security Administration.
The future of Social Security as a reliable income source is uncertain. Financial advisors encourage Americans to invest in their futures and secure a reasonable nest egg for a comfortable retirement.
Without sufficient action, reduced Social Security benefits might not be able to keep pace with rising costs.
"For Americans who are already struggling and living paycheck to paycheck, finding extra dollars to invest can seem nebulous if you're trying to balance expenses and provide for your family," explained Millsap. "My first recommendation is to find a trusted professional to create a tax-intelligent financial plan to ensure you're staying on track."
Whether you're looking to travel the world or just lay back and relax, the freedom to pursue your passions during your post-working years is still within reach.
Here are five steps to take that will help you navigate retirement without relying on Social Security:
Employer-sponsored retirement plans are among the most powerful investment vehicles for growing your nest egg. Plans including 401(k)s and 403(b)s offer the convenience of automatic paycheck deductions to ensure you're saving consistently. You can contribute pre-tax or after-tax money, depending on whether you want to reduce your taxable income now or benefit from tax-free growth and withdrawals in retirement.
Many 401(k) and 403(b) plans offer employer matching contributions. For every dollar you put into your account, your employer matches up to a certain limit, giving you what is effectively free money toward retirement.
Aim to contribute at least enough of your paycheck to earn the full match. For example, if you're employer offers a dollar-for-dollar match up to 6% of your salary, you should aim to allocate 6% of your paycheck toward your account. You may be able to earn an employer match with qualifying student loan payments.
In 2024, you can contribute up to $23,000 to your traditional or Roth 401(k) if you are under 50. Workers 50 or older can contribute an additional $7,500 catch-up contribution. The same contribution limits apply to 403(b)s. Employer-match contributions don't count toward your annual limit.
Whether you've maxed out your employer-sponsored plan or didn't have access to one to begin with, consider investing your retirement savings into an IRA to boost your savings. These simple but lucrative investment accounts offer the same tax advantages and compounding abilities as a 401(k) but with more flexibility.
IRAs are best when used alongside employer-sponsored plans to help you reach your retirement goals faster. They generally have low fees and give you greater control over your investments. Consider opening one of the best IRA accounts.
In 2024, people under 50 can contribute up to $7,000 to traditional or Roth IRAs (folks 50 and older can contribute up to $8,000).
However, most IRAs don't offer the employer-match benefit. Another downside is that the annual contribution limit is drastically smaller than employer-sponsored plans, so it's best to max out your 401(k) benefit first.
Health Savings Accounts are powerful financial tools with compounding power and triple tax advantages. Although designed to cover medical expenses, you may be able to use your HSA to supplement income during your retirement.
HSAs are funded by pre-tax dollars, grow tax-free, and can be withdrawn tax-free for qualifying medical expenses like hospital care, vaccines, and eye exams.
While setting aside funds designated specifically for medical expenses can be a great addition to your financial plan and prevent you from prematurely withdrawing from your retirement savings, HSAs can double as retirement savings accounts. Once you are 65, you can withdraw the funds from your HSA penalty-free for non-medical expenses. Keep in mind that you'll still be subject to income tax.
This can be particularly handy in conjunction with other retirement savings vehicles. It offers the flexibility of penalty-free and tax-free withdrawals for unexpected medical emergencies.
Like a monthly Social Security check, an annuity provides a predictable, steady income stream for many years, possibly even the rest of your life.
"If you do not like market fluctuations, then an annuity with a guaranteed income can provide great comfort," said Millsap. But you won't want to put everything in it in case life throws you curveballs and you need to pull some extra funds."
Annuities are purchased from insurance companies at a premium. In exchange, you'll receive monthly payments, but how much depends on the premium cost, the funds invested, the kind of annuity purchased, and the predetermined number of payments.
It won't replace years of consistent savings; rather, it offers a solution for people concerned about budgeting during retirement. Similar to income-focused retirement plans, annuities can help retirees budget more effectively while still having the potential to accrue value when invested. However, payouts are also subject to income tax.
Income-generating securities can diversify your portfolio and set you up with steady cash flow at the same time. These investments include dividend-paying stocks, bonds, short-term treasury bills, and CDs. Income investing can be a great way to help cover living expenses or grow your nest egg even further by reinvesting the returns.
"Municipal bonds can be great for tax-free income," said Millsap. "But there are also plenty of dividend-paying equities you can utilize as an income stream."
Investing in these securities won't replace the long-term growth potential that a 401(k) or IRA can offer, and it certainly won't replace a monthly Social Security check. While it can be a valuable investing and budgeting strategy for retirees or conservative investors, it won't yield high returns.
