The doubts are surfacing after estimates last week showed Social Security’s reserves are projected to run out in 2033, at which point the program will be able to pay out just 77% of benefits to seniors. That has consequences for many workers who plan to rely on Social Security for a major portion of their retirement income.
Many planners said they already take into account Social Security’s shortfall during planning sessions — as should all workers, they say — while offering several strategies for nervous Nellies looking toward their golden years.
“When news like this comes out, as it did last week, we field questions from clients concerned if that changes anything for them, or if we need to adjust anything in their financial plans,” Brian Ellenbecker, a certified financial planner and financial advisor at Shakespeare Wealth Management in Pewaukee, Wis., told Yahoo Finance. “But this isn’t new news necessarily. The Social Security shortfalls have been projected for some time.”
‘An important piece’
The latest estimate is a year earlier than what was stated in the 2022 report for the Old-Age and Survivors Insurance (OASI) Trust Fund, according to the annual report released Friday from the trustees of the program. The revision reflects a reduction in labor productivity and gross domestic product estimates.
How much a worker can expect from Social Security is especially pivotal for those closest to retirement. For instance, 40% of baby boomer workers expect Social Security to be their primary source of retirement income, compared with 25% for Gen X, 17% for millennials, and 16% for Gen Z, according to a 2022 Transamerica Center for Retirement Studies report.
“Being able to project what you’re going to receive is an important piece that will potentially dictate someone’s lifestyle in retirement,” Ellenbecker said. “Making an adjustment when planning for reduced future benefits is prudent.”
That’s what Jacob Sadler, a certified financial planner and senior advisor at Bay Point Wealth in Annapolis, Md., does. Sadler counsels clients in their mid-50s on Social Security when he reviews their annual benefit estimates and filing strategies.
“Importantly, we also model scenarios where Social Security benefits are reduced compared to their estimated statement,” Sadler told Yahoo Finance. “We will model a 25% reduction in benefits for clients mid-50s or younger, as this time frame to retirement corresponds to the 2034-35 estimate for depletion of the Social Security Trust Fund.”
While Ellenbecker didn’t need to make adjustments for his clients when the news on the Social Security shortfall came out again, it did “rekindle the conversation.”
Ellenbecker begins potential Social Security cutback conversations with his clients by getting a bead on their level of concern and whether it could sense to make an adjustments to their plan.
It also depends on how big of a percentage of their retirement income Social Security is expected to replace.
“If that’s going to be, say, 60% or more of their retirement income, we need to take a really deep dive into how changes in the actual benefit amount they might receive would have an impact on their lifestyle,” he said.
Making up the shortfall
One way to make up for Social Security’s shortfall is to amp up investment returns. Of course, with investments, you can never guarantee the rate of return, Ellenbecker said.
“You can try to increase the risk and add more equities. That doesn’t necessarily guarantee that you’re going to get a higher return, although it increases the likelihood that you will over that time.”
But risk tolerance is an important factor to consider before reallocating risk.
“Are they going to be able to weather the ups and downs that they’re gonna experience with a more aggressive portfolio?” Ellenbecker said. “If it’s not something they’re gonna be able to stick with, if they can’t sleep at night, that may not be the right move for them.”
It might be adjusting something else that they have more direct control over that is best to mitigate the potential lower benefit payout down the road.
“There are other levers to pull,” Ellenbecker said. “They can work a couple more years, for instance, or adjust their expected spending in retirement plan forecasts.”
But here is one big lever to grab on to and it’s almost counterintuitive. Retirees should double down on Social Security by waiting to get the biggest benefit they can.
“If someone has the flexibility to delay benefits, then the increase that you get by waiting is hard to match with any other source of income,” he said. “There’s a lot of power in waiting.”
If you choose to delay getting benefits from your full retirement age (FRA), which ranges in age from 66 to 67, until age 70, you earn delayed retirement credits, which come to roughly an 8% per year annual increase in your benefit for each year until you hit 70 when the credits stop accruing.
“That can definitely help combat the possibility of a smaller payout with their Social Security benefit,” Ellenbecker said.
Another, more doom-and-gloom way to plan for smaller Social Security benefits? Don’t plan on them at all, said Cary Carbonaro, a certified financial planner and director of Women and Wealth at Advisors Capital Management.
Many workers aren’t expecting those benefits anyway. A majority (78%) of Generation X workers, too, are concerned Social Security will not be there for them when they are ready to retire as are nearly half (47%) of millennials.
“We don’t even include Social Security in our clients’ retirement income plans until they are ‘actually’ taking it,” Carbonaro told Yahoo Finance. “We have always created retirement plans without including Social Security for our clients.”
Kerry is a Senior Reporter and Columnist at Yahoo Finance. Follow her on Twitter @kerryhannon.
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