Keeping these benefits in mind can help you financially thrive in retirement.
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Are your Social Security benefits taxable? For many Americans, the answer is yes.
Social Security was in the news a lot last year.
In October, there was a lot of talk about the program’s upcoming cost-of-living adjustment (COLA). Then, when the COLA was announced, there was speculation that Medicare cost increases would significantly eat into that increase (spoiler alert: they will).
But earlier this year, the Social Security Board released an updated report on the program’s financial status. And the news wasn’t great.
At this point, you may be wondering if Social Security is on the verge of collapse. And you’ve probably heard stories along these lines, albeit from unreliable sources.
The fact of the matter is social security can’t do it Bankruptcy occurs because there is a continuing source of income in the form of payroll taxes. When people work, money is raised for programs. Therefore, you don’t have to worry about your Social Security benefits running out.
But even if that’s not the case, you may want to tell yourself that Social Security won’t pay for your retirement.
What is actually happening in social security finance?
Social Security will face funding shortfalls in the coming years. As baby boomers leave the workforce and begin claiming benefits, Social Security won’t be able to generate enough income to maintain its payment obligations.
The program’s Old Age and Survivors Insurance (OASI) Trust Fund, which pays for retirement benefits, is scheduled to meet its financial obligations until 2033, after which benefits could be cut by 23%.
If lawmakers allow Social Security to combine the OASI trust fund and disability insurance fund, benefits would be paid in full until 2034. Beyond that, benefits could be cut by 19%.
These projections are likely to change in the coming years as the Social Security Administration Board continues to evaluate the program’s projected returns. But it’s important to note that there is no risk that Social Security will be completely abolished. But maybe telling yourself that isn’t such a bad thing.
Why we want to pretend that Social Security is disappearing
It’s easy to tell yourself that Social Security won’t pay your retirement benefits. If you don’t have income from Social Security, you’ll probably be more motivated to work on building your own retirement nest egg.
One reason some people are stingy with their retirement savings is because they think they can rely on Social Security for income. Of course this is not the case only Why people don’t save enough. Sometimes life gets in the way. But if you tell yourself you can’t rely on Social Security for your retirement income, you may need to increase your contributions to your IRA or 401(k).
If this doesn’t convince you, there’s something else you should know. Even without benefit cuts, Social Security only replaces about 40% of your pre-retirement wages. Most retirees need about twice that amount to live comfortably.
So even if nothing bad happens to Social Security at all and the program is able to pay out 100% of your benefits, it still makes sense to do your best to build up your retirement savings. Here are some ways to get a boost:
- Get a full workplace match every year with your 401(k) plan
- Every January (or whenever a raise comes along), put it in the bank.
- Get into the habit of budgeting and prioritize your IRA or 401(k)
You don’t have to worry about running out of Social Security. You don’t even have to pretend that it is. Be aware of how much these benefits pay you, and do your best to save well so they aren’t your only source of income in retirement.
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