You may have heard warnings about the future of Social Security. And if you’re a long way from retirement, you may be wondering if you’ll ever receive any benefits. Should you count on them?

It's true that Social Security is experiencing financial pressures, especially as the huge baby boomer cohort retires and collects benefits. Nonetheless, the system is certainly not going bankrupt. If no changes are made, it will need to make cuts in 2033, paying about 76 cents for each dollar of projected benefits, according to a recent report issued by the Social Security and Medicare trust funds. But this is still a big “if” – because a number of steps can be taken to shore up Social Security.

For example, raising the combined payroll tax from 12.4% to 15.76% would fully fund the program through at least 2095, according to the Social Security Board of Trustees. And other moves, such as changing the earliest eligibility age (currently 62) or the full retirement age (currently between 66 and 67) could also extend Social Security’s ability to continue paying full benefits, though these options may be less appealing. Ultimately, Social Security can be fixed, but for this to happen, Congress may have to make some difficult decisions.

In any case, Social Security was never designed to meet all your retirement needs. On average, Social Security will likely make up only about 30%, or less, of your pre-retirement income, according to the Social Security Administration – which means you’re going to be responsible for generating the majority of the income you’ll need in retirement. Furthermore, some of the proposed fixes for Social Security – such as moving back the earliest age for accepting benefits or the age at which you can claim 100% of your benefits – will likely increase the amount you need to save for your life as a retiree.

Focus on what you can control

While Social Security's future payouts may lie in the hands of Congress, you still have control over one key aspect of your benefits – when to take them. Although this decision is a long way off for you, and some of the age parameters may change, the essential principle will likely remain: The earlier you take your benefits, the smaller the monthly checks.

To illustrate: Currently, you can start collecting Social Security as early as 62. But, if you take benefits before full retirement age (likely between 66 and 67), those benefits could be permanently reduced by as much as 30%. Assuming you might spend 20 to 25 years as a retiree, this initial reduction can have a huge effect on your retirement income stream. Plus, the decision to take benefits early can also affect your spouse. Conversely, benefits could be increased by as much as 32% for those who waited until 70, when the benefits “max out.”

So, when you do become eligible for Social Security, you’ll want to be in a position where you can afford to delay taking benefits, if you choose. And that means you’ll need to build your retirement resources as much as possible while you're working. Toward that end, you’ll want to contribute as much as you can afford toward retirement while balancing other goals, such as building an emergency savings account and paying down debt. While everyone's needs are different, a good rule of thumb is to save 10% to 15% of your income toward retirement. Consider these strategies:

  • 401(k) or similar employer-sponsored plan – You can fund a 401(k) with pretax dollars, which lowers your taxable income for the year, and your money can grow on a tax-deferred basis. Depending on your plan, you might also have access to a Roth 401(k). With a Roth 401(k), you put in after-tax dollars, so you don’t get an immediate reduction in your taxes, but your earnings growth and distributions in retirement are generally tax free. In 2022, you can contribute up to $20,500 to a 401(k), or up to $27,000 if age 50 or older. At a minimum, you’ll usually want to contribute enough to your 401(k) to earn your employer’s matching contribution (if one is offered), and if you're not saving enough today, try to increase your savings by at least 1% of your salary each year.
  • Health savings account (HSA) – If you are covered under a high-deductible health plan (HDHP), you can generally contribute to an HSA, which has triple tax advantages: Your contributions are made with pretax dollars, reducing your taxable income for the year; your earnings grow tax free; and your withdrawals are tax-free, provided the money is used for qualified medical expenses. And the money in your HSA can be carried over from year to year – you aren’t obligated to “use it or lose it.” Thus, the money could ultimately be used to help pay for qualified health care expenses in your retirement – and these costs typically make up a significant portion of your spending needs as a retiree. In 2022, you can contribute up to $3,650 to an HSA if you have single coverage, or $7,300 for family coverage.
  • IRA – Depending on your income level, you may be able to contribute to a traditional or Roth IRA. A traditional IRA is generally funded with pretax dollars and the earnings can grow tax deferred. You put in after-tax dollars to a Roth IRA; your earnings and withdrawals are tax free if you’ve had your account at least five years and you don’t take money out until you’re at least 59½. In 2022, you can put in up to $6,000 to an IRA, or up to $7,000 if age 50 or older. (However, your ability to contribute to a Roth IRA is reduced, and eventually eliminated, at certain income levels.)

Looking into the future

No one can say for sure how Social Security may change in the future. But if you’ve prepared yourself financially, you may find that Social Security benefits can be a valuable part of your retirement income. Your financial advisor can illustrate some possible scenarios involving Social Security that can help you create and follow a long-term financial strategy.