How to Prepare for the Potential Decrease in Social Security Benefits

“Hey Mike, what strategies can you implement to help prepare for a possible drop in Social Security benefits?” Discover what you can do now in preparation for the potential decrease in Social Security benefits. 

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What is How to Retire on Time?

Welcome to How to Retire on Time, a show that answers your retirement questions. Say goodbye to the oversimplified advice you've heard hundreds of times. This show is about getting into the nitty-gritty so you can make better decisions as you prepare for retirement. Text your questions to 913-363-1234 and we'll feature them on the show. Don't forget to grab a copy of the book, How to Retire on Time, or check out our resources by going to www.retireontime.com.

Mike: 00:05

Welcome to How to Retire on Time, a show that answers your questions about all things retirement, including income, taxes, Social Security, health care, and more. This show is an extension of the book, how to retire on time, which you can grab today on Amazon or by going to www.how to retire on time.com. My name is Mike Decker. I'm the author of the book, how to retire on time, but I'm also a licensed financial adviser, insurance agent, and tax professional, which means when it comes to financial topics, we can pretty much talk about it all. So that said, please remember, this is just a show.

Mike: 00:36

Alright? Everything you hear should be considered informational as in not financial advice. If you want personalized financial advice, then request your wealth analysis from my team by going to www.yourwealthanalysis.com. With me in the studio today is my esteemed colleague, mister David Fransen. David, thanks for joining me.

David: 00:54

Hey. Thanks for having me.

Mike: 00:55

Now David's gonna be reading your questions, and I'm gonna do my best to answer them. Please send in your questions right now or anytime during the week. Just save this number, 913-363-1234. That's 913-363-1234. Or you can email questions to hey mike at how to retire on time.com.

Mike: 01:15

Let's begin.

David: 01:17

Hey, Mike. What strategies can you implement to help prepare for a possible drop in Social Security benefits?

Mike: 01:24

Common question. So it's if you look at ssa.gov and you look at your Social Security statement, it's suggesting that by, I think, it's 2032, there may be a 20% reduction in benefits unless something significant changes. Talk about a very passive way to say, hey, congress. This isn't working. So overall strategies, this is how I I think about it.

Mike: 01:46

If your entire retirement plan is based on fixed income, that may be a risk you can't plan around because you've already locked up your your income into income streams that are fixed. This is why I think growth is so important. So when it comes to your projections, maybe project in the future in a plan, maybe a 1% growth on your assumed income from Social Security when it's really around 2 to 3% year over year on average. So that kind of gives a more conservative projection estimate based on your future income earnings. But it still doesn't solve the problem.

Mike: 02:23

Some annuities out there have an add on benefit or rider that should help offset it if it happens, but you're paying for that. So anytime you you're working with an insurance company and looking for a guarantee, there's an associated cost to transfer that risk to the insurance company. So I'm not sure that's necessarily right or wrong. It's just that that is an option with some strategies that I've seen. But in my opinion, if it were me, I would make sure that there's a portion of the portfolio focused on growth.

Mike: 02:53

So that let's say in 2032, you do a nice simulation to where you take a 20% dip in your social security projections and you're able to offset that with your income from your portfolio. So here's how I I plan around it. Here's the analogy. Imagine you've got a jar that you need to fill up. Alright?

Mike: 03:12

And you've got rocks and you've got sand. Which one do you put in 1st? Well, in my mind, if you put the sand in 1st and the rocks in second, the rocks will sit on top of the sand, and the jar is never really full. Right? There's gaps and cracks and crevices within the rocks.

Mike: 03:28

However, if you put the rocks in 1st and the sand in second, the sand fills in all the gaps, cracks, and crevices, making the jar actually full from a volume standpoint. So here's what I mean by that. If you have a portfolio that's focused on growth, and some of it's for long term growth, so you've got risk associated with it, but it's really it has more growth potential than other parts of your portfolio. And another part of your portfolio that's principal protected cannot lose money. And you've structured it in such a way that you can take income from either source if markets are up or down, then you've got a portfolio that can sail through market crashes without accentuating losses while allowing you to have more growth potential and future flexibility overall.

Mike: 04:15

K? Are you with me so far?

David: 04:17

I'm with you.

Mike: 04:18

K. So if or when social security does drop, you can adjust your portfolio income to fill in that gap in your overall income. Because you're deciding each year how much you're gonna pull from your portfolio. If social security drops a little bit, fine. Just take a little bit more from your portfolio.

Mike: 04:37

You've planned for growth and flexibility in your overall plan. I cannot say emphatically enough how important that is. No one knows the future. You can't time the markets. But when you can plan a portfolio around growth with some protected so you can sell through market crashes and others that, yeah, they might take a hit every 7 or 8 years or whenever the markets crash.

Mike: 05:02

But overall, you've got great growth potential. That in my mind is the best way to prepare for these future hiccups because it maybe it's not Social Security. Maybe it's tax issues. Maybe there's an inflationary issue where it just gets out of control again. I mean, if we repeat the seventies, did did you know this, David?

Mike: 05:22

So in the seventies, they thought they got inflation under control, so they started dropping rates.

David: 05:28

Okay.

Mike: 05:28

And then inflation just, boom, came back, rid its ugly head. So then they increased interest rates again, and they got it back under control. And it was going down, and things seemed okay. So they started dropping rates again. And then boom.

Mike: 05:39

It came back again. Well, what's happening right now? They started dropping rates. And did inflation keep going down? No.

Mike: 05:47

The last reading I saw, inflation was a little bit above what they were expecting. That's not a good sign.

David: 05:52

Oh, boy.

Mike: 05:52

So either we're gonna stay a new normal at this higher rate or maybe we're in for another season of inflationary issues. How do you plan around that if you've got fixed income? You can't. No. So if social security taking a dip or a hit in your future plan is a concern, I would propose that maybe you don't have as good of a plan as you thought.

Mike: 06:19

Because if that's gonna derail your retirement, then think about all the other things that could happen. And what are you supposed to do about it? Yeah. We want to control our outcomes. We want to control our life.

Mike: 06:31

We want to we want to get rid of risk. We want to actively avoid risk. Well, the truth is you can't not have risk in retirement. So you've got to have strategies in anticipation for these risks and then stress test your plans so that whenever whatever happens, you've got the ability to dynamically adjust your plan and absorb these issues.

David: 06:57

Mhmm.

Mike: 06:58

We can't control the market. You can't really control tax rates. You can, you know, elect your congresspeople.

David: 07:04

Right.

Mike: 07:04

But still, they're gonna decide what they're gonna do. You really can't control inflation that much because you can't control the Fed. So what do you do? You control what you have and how you plan. And I get that the income streams from annuities, pensions, and Social Security are great because they're guaranteed for life.

Mike: 07:24

But it's always that that poor old grandma that's in the mid to late eighties that's struggling to get by because they're stuck on fixed income.

David: 07:34

Yeah. Imagine if you had retired, like, in, I don't know, 2019, and you had all these fixed income rates that seemed like, oh, yeah. This is I this is enough.

Mike: 07:41

It's perfect. Yeah. What could go wrong?

David: 07:43

Oh, yeah. What could go wrong? I don't know. Lots of things happened.

Mike: 07:46

Whatever smart people say there's a low chance of that happening, just wait. There's a really dumb expression in this industry that says, and you're gonna laugh when I say it, it doesn't matter until it matters.

David: 08:00

Oh.

Mike: 08:01

Well, isn't that always true? But look look at, 2008, the financial crisis and what really happened. It doesn't matter that they're selling CDOs and these synthetic insurance products backing the mortgage industry and

David: 08:14

Right.

Mike: 08:14

Doesn't matter until it matters. People got greedy. Wall Street gets greedy from time to time. Oh, but who doesn't pay their mortgage? They said.

Mike: 08:24

Well, when you have variable mortgage rates and you have several of them as the story goes and people stop paying it, and then it creates issues. And then, you know, it's a pinprick that starts the contagion. Sorry if that's a triggering analogy post pandemic.

David: 08:40

Yeah.

Mike: 08:41

But things happen. So to say that that's a low probability, it probably will never happen. Well, what if it does? Are you prepared? You can't plan for Armageddon.

Mike: 08:50

I'm not suggesting that. So I'm not saying put all your money into a mattress. I'm saying maybe don't decide your future income in a fixed rate so that you can't adjust along the way. Flexibility, I think, is a key component to any retirement plan. And this is especially true if you're concerned about a potential social security drop in the future.

Mike: 09:12

And who knows? It might happen. Maybe they fix it, but it creates an inflationary issue. That's another problem to solve. Mhmm.

Mike: 09:19

So it's like whack a mole. Yeah. There are many risks in retirement, and growth with flexibility in my mind is one of the best ways to approach it. That's all the time we've got for the show today. If you enjoyed the show, consider subscribing to it wherever you get your podcast.

Mike: 09:36

Just search for how to retire on time. Discover if your portfolio is built to weather flat market cycles or if you're missing tax minimization opportunities that you may not even know exist. Explore strategies that may be able to help you lower your overall risk while potentially increasing your overall growth and lifestyle flexibility. This is not your ordinary financial analysis. Learn more about Your Wealth Analysis and what it could do for you regardless of your age, asset, or target retirement date.

Mike: 10:04

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