If you’re a worker in your 40s, retirement might feel both far away and uncomfortably close at the same time. At this stage, you’re probably smack at the midpoint of your career, which means you still have time to plan for retirement, but also can’t afford to not think about it.
Of course, planning and saving for retirement can be tricky when your mind is occupied with other pressing matters — work deadlines, mortgage payments, soccer tournaments and/or college tuition (depending on the age of your kids), and, in some cases, caring for aging parents.
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Making matters even more potentially stressful is that you may keep hearing about Social Security cuts. If you’re struggling to fund an IRA or 401(k), the idea of not getting your benefits in full can be scary.
The reality is that it’s too soon to panic about Social Security cuts. But it’s also important to have a backup plan — whether those cuts happen or not.
Social Security is facing pressure
The reason Social Security faces benefit cuts boils down to a shrinking labor force. As baby boomers continue retiring, more people are collecting benefits while a smaller share of workers are paying into the system. Americans are also living longer, which means benefits are being paid out over longer periods of time.
Social Security’s Old-Age and Survivors Insurance Trust Fund, from which retirement benefits are paid, is expected to be depleted within the decade. From there, benefits could be slashed if lawmakers don’t find a way to prevent that.
That said, Social Security has faced funding challenges before, and lawmakers have repeatedly acted to preserve the program. Because Social Security remains enormously popular and important across political lines, lawmakers are unlikely to allow sweeping benefit cuts to take effect without attempting some form of intervention first.
That doesn’t necessarily mean cuts won’t happen, or that the solutions to prevent them won’t introduce other unwanted consequences, such as higher taxes. But it’s certainly not a given that Social Security will have to slash benefits.
You still need a backup plan
Even if Social Security remains largely intact, if you’re in your 40s, it’s important to have a solid retirement plan that doesn’t depend on those benefits too heavily. This is crucial regardless of whether Social Security is able to pay benefits in full.
Even without cuts, Social Security will only replace about 40% of your wages if you earn a typical salary. It’s common for retirees to require about twice that much income to maintain their lifestyles without major spending cuts.
That’s why, in the coming years, it’s a good idea to focus on boosting your retirement savings. The good news is that doing so might get easier as you enter your 50s. At that point, your kids might be grown and out of the house, you may have higher earnings, and you’ll be eligible for catch-up contributions in an IRA or 401(k) plan.
Of course, your retirement plan contributions don’t have to do all of the heavy lifting. If your company offers a 401(k) match, snagging it in full could put thousands of dollars extra into your savings each year.
Plus, with the right investments, you can grow a series of modest IRA or 401(k) contributions into a lot of money over time. The key is to load up on stocks across a range of market sectors or put your money into broad market index funds or exchange-traded funds (ETFs).
For workers in their 40s, Social Security uncertainty is a legitimate concern — but not necessarily a reason to panic. There’s a good chance lawmakers will be able to stave off benefit cuts. But you should set yourself up to not be too reliant on Social Security, because even if the program continues to pay benefits in full, those monthly checks most likely won’t be able to sustain you once you stop working.