Baby boomers who think they can rely on Social Security to support them during retirement might want to make other plans.
According to the Social Security Administration, trust funds that supply the program with money will deplete their reserves by 2033.
That's three years earlier than previous projections.
This situation brings a lot of uncertainty to current and future retirees who have not made independent financial plans outside of Social Security payments.
Will Social Security Run Out of Money?
Social Security gets its money from several trust funds. Some of these trust funds will run out of money long before 2033. The Disability Insurance Fund, for instance, will only last until 2016. The Old-Age and Survivors Insurance fund is expected to last longer.
Several factors have lead to this depletion. Currently, the Social Security Administration awards more money than it gets from interest and tax payments. If this trend continues, it will run out of money at some point in the future. The 2033 projection is based on current Social Security benefits, taxes, and interest rates. Any changes to those factors could lengthen or shorten the program's life.
Just because the Social Security Administration depletes its funds doesn't necessarily mean that retirees will lose all of their benefits. The Administration says that non-interest income entering the program will fund 75 percent of benefits. Retirees will likely see a substantial loss but not a complete loss of all benefits.
How Can You Prepare for Social Security's Insecurity?
Baby boomers can take several steps to prepare for reduced Social Security payments.
Claiming Benefits: Fox Business reports that people can get larger benefits by delaying retirement. The current age of retirement is 66. Delaying retirement by one year means an 8 percent increase in benefits. Delaying two years means a 16 percent increase. Those who wait until they're 70-years-old to retire will get a 32 percent increase.
Even if beneficiaries cannot wait three years after retirement age to apply for benefits, they shouldn't take early retirement. Those who take early retirement only receive 75 percent of the standard benefit.
Know How To Work The System: Social Security benefits are based on so many features that most people never understand how the system works. There are several rules that can prevent some beneficiaries from receiving full payment. Laurence Kotlikoff at the Huffington Post suggests that people know the many “gotchas” in the program to take advantage of benefits.
More from GFC, Below
Many of these “gotcha scenarios” have to do with marriage. Ex-spouses can only receive full spousal benefits if they had been married for at least ten years and don't remarry before they turn 65. Any couple married even one day less than ten years will not receive full spousal benefits. Those who get remarried lose those benefits, too. If someone waited until 65 to get re-married, though, he or she could collect benefits from the previous spouse.
These rules might seem minor to most people, but they have real impacts on the lives of people who don't understand them. Learning more about the complex system could help you manipulate it in your favor.
Reduce Household Spending: The less money you spend, the less you need. This doesn't necessarily mean that retirees have to experience a reduced quality of life. There are numerous ways to reduce expenses without suffering.
Shop around for cheaper health and car insurance. People over 60 need some kind of health insurance to help pay for medications, visiting the doctor, and medical emergencies. Insurance costs are usually higher for the elderly, but shopping around can still help you save hundreds of dollars a year. Lower car insurance can also help you save. If you've had the same insurance policy for several years, then you could find that you save a considerable amount of money by switching to another company or reapplying for a policy through your current provider.
You can lower your expenses by moving into a smaller home. Retirees find that they don't need large homes because they no longer have children living under their roofs. Moving into an apartment, condo, or small house could help you save money every month. Smaller living spaces are easier to maintain in your old age, too.
Earn Money During Retirement: Just because you retire doesn't mean that you have to stop making money.
U.S. News reports according to a Gallup Poll, up to 19 percent of retirees earn extra money from rental properties. If you already own more than one property, then you could start renting one for extra cash. If you don't, you could use your savings to purchase and rent apartments or houses. That way, you turn your savings into a steady source of income instead of just letting it sit in the bank earning meager interest.
Retirees could earn money through consulting. You don't have to completely re-enter the workforce to make extra money. Retirees who have years of experience in certain industries can generate income by offering their services on a part-time or freelance basis. That way, you get to decide how much to work so you can enjoy retirement without going broke.
Are You Ready for Retirement?
The more you save now, the more money you'll have when you retire. Whether you have been saving for decades, years, months, or weeks, every dollar will help. The best time to start preparing is always now.
Since retirement and Social Security involves so many factors, it makes sense for people to meet with financial planners. Meeting with a financial planner can help you make realistic plans for the future. Just knowing what to expect can help you prepare for the future.
People have numerous retirement options. With Social Security becoming less reliable, current and future retirees should consider how they can make ends meet by saving, lowering their household expenses, and finding other sources of income. It's a reality that Baby boomers might not like, but they'll have to face it.