How Social Security Fits Into My Retirement Plans

According to its trustees’ most recent projections, Social Security’s trust funds are expected to run out of money by 2034. That’s barely over a decade from now, and it’s well before I turn 62 and would be first able to collect my retiree benefits.

Of course, even when those trust funds empty, Social Security is still expected to be able to pay out somewhere around 75% to 80% of its benefits under current rules. As a result, it makes sense even for those of us more than 11 years away from retirement to consider what role the program will play in our futures. Personally, as I consider how Social Security fits into my retirement plans, I expect that it will cover my Medicare Part B and other related health insurance premiums, and not much else.

Image source: Getty Images.

That might sound conservative, but is it really?

As of April 2023, the average retiree receives $1,834.80 in monthly Social Security benefits. Assuming flat inflation for both Social Security and Medicare, but accounting for the risk of a benefit cut when the trust funds empty, 75% of that amount is $1,376.10. The current basic Medicare Part B premium is $164.90 per month, leaving $1,211.20 per month. Assuming around $128 per month in additional Medicare-related insurance premiums, the amount remaining works out to $1,083.20 per month.

Net — on average, a typical retiree should be OK assuming Social Security would cover Medicare insurance costs, plus leave just over $1,000 per month to cover other costs of living. On the surface, that would make this plan sound conservative, but when you dig in a bit deeper, there are three key reasons why there’s really less wiggle room there than it might appear.

First, if your combined income (adjusted gross income + nontaxable interest + half your Social Security income) is high enough, your Social Security benefits become taxable. Those taxes start as low as $25,000 of income as an individual or $32,000 as a married couple filing jointly. If you’ve got a pension, a Traditional-style retirement account, or an ordinary investing account, it gets pretty easy to step over those limits and see your Social Security benefit get taxed.

Next, your Medicare Part B premium is also somewhat based on your income. While that $164.90 per month is the starting amount, that monthly charge can reach as high as $560.50 per person if your household’s income is high enough. 

Finally, if you look at history, the last time Social Security got into serious funding trouble, the fix included a combination of tax hikes and benefit cuts. Assuming a similar path forward this time, it’s likely that any of us who will still be under age 62 by the time the next set of patches is needed will pay for those patches in a similar way.

Put those three factors together, and the concept of planning around “what Social Security giveth, Medicare taketh away” starts to look downright reasonable.

What can you do about it?

Of course, operating this way would mean that you’re expecting to get less from Social Security than you otherwise might. This creates a need to build a bigger nest egg to make up for the gap that creates. Investing a bit more to cover that gap helps in a few ways.

First, the money you’re investing is money you’re actively putting away for your future. Should it grow large enough, it could provide enough of a nest egg to make up for the missing money from any benefits cut in Social Security’s next round of fixes.

Next, should taxes go up to help cover the next set of fixes to Social Security, it’s always easier to cut back on investing than it is to have to choose what expenses to cut.

Finally, by coming up with money to regularly invest, you’re keeping that money out of your lifestyle. That means you’re already making priority calls on what is and isn’t important to you, and you’ve got a reasonable understanding of what you’re willing to live without. This can help make it easier to adapt to a future with some combination of higher taxes and lower benefits to support the fixes needed to keep Social Security functional.

Get started now

With Social Security’s trust funds expected to empty by 2034, time is running short to comfortably build a nest egg to make up for the gap in benefits that will create. Get started now, and improve your chances of being able to make simple changes early that can set yourself up to be in a better spot later. After all, when Congress eventually does patch Social Security, those patches will bring changes that will likely affect you, whether you’re ready for them or not.