If Social Security Does Cut Benefits, This Is My Plan

Social Security benefit cuts are a very real possibility in the coming years. In fact, the most recent Social Security Trustees' report indicates that the Old-Age and Survivors Insurance (OASI) trust fund is scheduled to be depleted as soon as 2032, resulting in an automatic 22% reduction in benefits.

Now, Congress is likely going to act to prevent that. But there are no guarantees, which is why my retirement plan is built on the assumption that benefit cuts are going to occur.

I'm also aware that while Congress stepped in to shore up Social Security in the 1980s (when it last faced major threats to its financial stability), the modifications included de facto benefit cuts in the form of a change to the full retirement age. I know this could happen again.

To make sure I'm OK financially, no matter what lawmakers do or don't do, here are a few key things I'm preparing.

Building multiple income sources

The first and most important thing I'm doing is making sure I don't count on Social Security to replace too much of my income. Even in a best-case scenario, benefits are only intended to replace 40% of what you earned. And benefit cuts mean even less money coming in.

I want enough other income to support myself no matter what happens with Social Security, so I'm saving aggressively in retirement accounts. My husband and I also own a rental property. Social Security is going to help us support ourselves, but we'll also be able to take distributions from a 401(k) and collect rent to cover the bills in case I don't get all my promised benefits.

Trimming fixed expenses

While I'm hoping to ensure I have plenty of income in retirement, there's another key factor I'm focusing on: my fixed expenses. The higher my fixed expenses are, the more income I'll need my investments and Social Security to produce.

Since I don't know if I'll get my full Social Security benefit and I'm not able to save an unlimited amount, I'm also taking steps to keep my expenses reasonable. That way, I'll be able to live on less if I need to.

To keep my expenses low, I'm committed to paying off my mortgage before I retire so I'll have lower housing costs. We invested in solar panels and energy-efficient upgrades to our home to keep our utility bills low. And we're planning on living in Florida as retirees, where there is no state income tax.

By reducing some of my highest costs, I'll be able to comfortably survive even if I end up with only 78% of my Social Security benefits to pay the bills.

Planning to delay my Social Security claim

I don't have control over whether the government cuts benefits, but I do control whether I give myself a 24% boost to my Social Security check. I just have to delay my Social Security claim until 70 to do it.

Social Security has a full retirement age of 67 for anyone born in 1960 or later, and since I was born in 1983, my FRA is 67. I plan to wait not just until 67, but actually until 70 to claim my benefit. This allows me to avoid early-filing penalties that apply before full retirement age and to claim delayed retirement credits.

I'm able to earn delayed retirement credits for each month I wait after age 67 up to age 70. These are going to increase my benefit by 24% in total if I wait the full three years. That helps offset most of the money I'd lose if the trust fund ran dry.

Studies have also shown a delayed claim gives me a solid chance not just to get more monthly income but to get more lifetime income.

Maintaining a cash cushion

While I plan to have a lot of money invested, I don't want to get into a situation where I need to sell stocks at a loss during a market downturn just because I have bills to pay. This becomes a bigger concern if Social Security benefits are cut, as I won't have as much money coming into my bank account from Social Security to cover essential bills.

I'm planning to ensure that I don't need to sell at a bad time by maintaining a cash cushion. I want at least two years of cash in liquid savings to cover my costs without selling investments. That way, I'll be able to wait for a market recovery if there's a downturn.

Making sure my retirement budget is able to withstand benefit cuts

Finally, my last big move is to build a budget with a cushion. I don't want to have just enough income to pay the bills. I want at least a 20% buffer, so I don't face hardship if I have unexpected bills or if Social Security benefits are cut.

Building some extra wiggle room into my budget means I won't have to stress about surprises, and I'll be able to use my savings to see me through a rainy day if one comes in my later years.

Bottom line

Here's the reality. I don't think Congress is going to let a 22% cut to Social Security benefits happen. I do think there's a possibility that the full retirement age could be raised, or that COLAs could be reduced as part of a reform package. But even if those things don't happen, the steps I'm taking are good moves.

I'd rather end up with too much money than too little, and saving more, delaying my claim, and keeping cash accessible are general best practices for building a secure future. So, while I think failing to prepare for Social Security cuts could be one of the biggest financial mistakes anyone could make, I would still take many of these steps even if I were 100% confident in Social Security.

No one has control over what the government does, so making sure to be financially stable without outside income sources just seems like a good approach. If all turns out to be well with Social Security, I'll simply be glad to have the extra funds at my disposal, but if things go wrong, I'll still be OK.

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