According to a recent study by the Government Accountability Office, Social Security will start to run out of money by the year 2036. This is primarily because of the simple fact that, according to the study, "people are living longer and labor force growth has slowed." The dubious year of 2010 represented the first time since 1983 that the Social Security trust began paying out more in benefits than it collected in tax revenue. (For related reading, see How Much Social Security Will You Get?)
SEE: Retirement Planning Basics
If the current trends persist for the next three decades, then the 55 million Americans, who currently receive Social Security benefits, will increasingly find their future payouts in jeopardy. The Congressional Budget Office (CBO) has also weighed in on the subject. It estimates that Social Security will be unable to pay all of its benefits by 2039, and that benefits would need to be cut by some 20% by 2040 to account for the shortfall. (For more information, see 10 Common Questions About Social Security.)
Overall, unless the economy makes a miraculous recovery and unemployment falls back to the 4% levels of several years ago, the Social Security system will need some significant adjustments within three decades. Politicians are currently weighing a mix of increasing the retirement age, increasing payroll taxes and lowering benefits for certain recipients of benefits.
Instead of hoping that Washington gets its act together, individuals would be best served by planning for the worst. The worst case scenario is, of course, that the individual won't receive any Social Security benefits when reaching retirement. And though unlikely, it can help shift the mindset to making significant personal changes to find alternative avenues to ensure an adequate income level following one's working years. With that, here are five potential ways to offset any Social Security shortfall.
Live Somewhere Cheap
Every year, numerous publications provide a ranking of the most affordable places to live. Smaller towns usually fit the bill, as do towns with a public university that cater to cost-sensitive college students. Areas hard hit by the housing downturn also offer the opportunity to pick up a house at depressed levels. Depressed housing markets include Fort Myers, Florida; Phoenix, Arizona and Las Vegas, Nevada. Moving abroad could also qualify as many international locations are very affordable. (For more information, see 5 Worst U.S. Housing Markets.)
Save More for Retirement
This may seem obvious, but there are a number of avenues to increase retirement savings. Maxing out the percentage allocated to retirement plans, including employer 401(k) and Roth IRA plans, is key. After-tax funds also earmarked for investment accounts can be helpful. (To learn more, see 7 Stable Investments For Your Retirement.)
Save More Wisely
Finding more prudent ways to preserve and grow one's wealth can be equally as important as saving additional funds for retirement. Investing in low-cost investments, such as index funds or mutual funds with below average expense ratios, can really add up over the years. Seeking out higher returning investments can also make a lot of sense, especially for younger savers that are able to tolerate more risk and volatility in their investment portfolios. Finally, avoiding pitfalls, such as chasing investment classes that have experienced strong recent returns, can also make for big savings over the long haul. (To learn more, read Stop Paying High Mutual Fund Fees.)
Spend Less While Working
Daily habits can be among the most difficult to break. However, cutting certain spending, be it through carpooling to work or eating at home can turn into vast sums over decades. Of course, cutting down on spending for big ticket items, be it housing, cars or vacations can have an even bigger impact and leave more funds that can be set aside for an eventual retirement.
Delaying retirement can also be a worthwhile endeavor. This isn't a viable option for more labor intensive careers, but individuals in service industries are frequently able to stay intellectually fit well beyond the technical retirement ages of 65 to 67. Formalizing a hobby could also add some level of discretionary income.
The Bottom Line
At the end of the day, Social Security benefits will most likely be available for the vast majority of Americans for many decades to come. But finding alternative ways to boost retirement savings surely can't hurt. At best, the additional funds available can be combined with Social Security to live even better in one's golden years. At worst, they will be the only funds available, but should prove enough to have a decent standard of living throughout retirement. (Also, check out Top 5 Underestimated Retirement Expenses.)