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How to plan for a smaller Social Security check

Robert Powell, Special to USA TODAY

Absent any changes, Social Security will be able to pay scheduled retirement and survivors benefits on a timely basis until 2034. And then, its reserves will become depleted and continuing tax income will be sufficient to pay only 76% of scheduled benefits.

So, what would that look like?

Well, a current retiree who now receives $1,503 per month from Social Security (the average benefit in January) would receive $1,142, a cut of $361 per month. And a married couple receiving $2,531 per month would receive $1,923, a cut of $608.

Viewed another way, average-income single adults who retired between 2015 and 2020 will receive over the course of their retirement about $500,000 in Social Security benefits, and couples will receive roughly $1 million, according to a report published by the Urban Institute.

The cut in scheduled benefits would, one, reduce to $380,000 the total amount of Social Security benefits for average-income single adults, a cut of $120,000, and, two, reduce to $760,000 the total amount of Social Security benefits for couples, a cut of $240,000.

What’s more, under scheduled law, millennials who turn 65 around 2050 are projected to receive in real dollars about twice as much as those retiring in 2018, about $1 million (or $760,000 with the benefit cut) for an average-income single adult and $2 million (or $1.5 million with the benefit cut) for a couple, according to the Urban Institute.

So, what might you do to plan for cut in scheduled benefits?

Craft a financial plan

 Assess what you need to do, if anything, to replace the possibility of lost income, says Larry Stein, president of Disciplined Investment Management. “For some, the possibility of that lost income might be a non-event, while for others, it could be significant,” he says.

Indeed, in 2014 for instance, Social Security benefits accounted for between 54% and 72% of family income in the three lowest income quintiles, compared with 18% to 34% of family income in the two highest quintiles.

Put another way: the lost income would be a more significant problem for those in three lowest income quintiles.

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Plan on Congress doing something

 The roof might have to start leaking, but Congress will do something sooner or later, one expert says. Michael Lonier, a financial planner with Lonier Financial Advisory, says the likely adjustments to Social Security (and Medicare for that matter) are higher taxes while working, later eligibility for benefits, and higher in-program costs and taxes for higher income participants.

“Everyone would be impacted by the first two, and those with lower expected retirement incomes will be the most affected,” he says. “Essentially this means that those with lower expected retirement incomes need to think about working longer if they are able and to save more sooner to afford the same lifestyle in the future that the two programs support today.”

How much more? Any additional amount of savings is better than none, Lonier says. “The more the better,” he says.

Of course, those with a longer time horizon can make up the difference more easily than those with a shorter time horizon. For instance, a millennial returning in 2050 would have to save only an extra $200 per month over the course of 30 years (earning 7%) to make up the difference between 100% of scheduled Social Security benefits and 76% of scheduled benefits.

As for those entering retirement over the next 10 years, delaying retirement by one to three or more year will allow them to increase savings while shortening the period their retirement savings needs to support, Lonier says. 

Delay claiming Social Security

Waiting to claim Social Security until age 70, the age at which you would receive the highest possible Social Security benefit, could also offset the 24 percentage point reduction in scheduled benefits.

That’s because Social Security retirement benefits are increased by a certain percentage for each month you delay starting your benefits beyond full retirement age, up to age 70. So, for instance, if you were born in 1960 or later, you would get 124% of your full retirement age monthly benefit because you delayed getting benefits for 36 months.

So, if your FRA benefit was $2,000, your benefit would be $2,480. And with the scheduled cut in benefits it would be $1,884. But contrast, it would have been $1,520 if you claimed at FRA with the scheduled cut in benefits.

Adopt a healthy lifestyle

Lonier also says everyone should adopt as healthy a lifestyle as possible as early in life as possible. “A healthy lifestyle means more vegetables and fruits, less fatty meats, more exercise and better stress management, no smoking, and little or no drinking. Find work you enjoy doing. Such a lifestyle may enable someone to be healthy enough to be able work longer and spend less on health-related expenses. Spending less means higher savings. The improved quality of life is a bonus.

Do nothing – at least for the time being

 For his part, Stein says he can't envision changing his strategy because of an event that could happen in 14 years and seems to have a low probability of occurring. “Chances are, the government is going to do something to make up that shortfall, though I suppose insolvency is always a possibility,” he says. “Unless this would place a client in dire straits, I am unlikely to make any adjustments in strategy.”

Of course, you might have fewer regrets if you do something – just in case. “How serious are you about taking responsibility for your own retirement?” Lonier asks. “Do you think you'll get a retirement bailout?”

Robert Powell is the editor of TheStreet’s Retirement Daily (www.thestreet.com/retirement-daily) and contributes regularly to USA TODAY. Got questions about money? Email Bob at rpowell@allthingsretirement.com.

This article originally appeared on USA TODAY: Social Security: Making up for retirement shortfall