The retirement planning landscape will see some dramatic changes in 2025, from ‘super catch-up’ contributions to new required minimum distributions. Of course, there was also a 2.5% boost to Social Security benefits to account for rising inflation. But whether these trends are sustainable is a growing concern.
Recent data from the Social Security Administration and financial planning experts paint a sobering picture that demands attention—and action—from those planning their retirement years. In this article, we will take a look at these numbers and why you may want to rethink your retirement planning and portfolios.
The Numbers Don't Lie
The latest projections from the Peter G. Peterson Foundation, a nonpartisan organization dedicated to raising public awareness of fiscal challenges, projects that indiscriminate cuts could come in just nine years as trust funds head toward depletion. Without legislative intervention, retirees would see a 23% reduction for all beneficiaries in 2033. This stark reality means that a retiree expecting $2,000 in monthly benefits might receive only $1,540, a significant shortfall that could derail retirement plans.
The program’s funding gap represents about 1.2% of GDP, according to late 2024 estimates, highlighting the magnitude of the challenge. While Social Security won’t disappear entirely, the projected benefit cuts could significantly impact retirement lifestyles. Adding to the concern, the 2026 Cost of Living Adjustment (COLA) is forecast to hit 2.1%, continuing a trend of modest increases that may not keep pace with retirees’ actual living costs under current program guidelines.
On the campaign trail, President Trump repeatedly indicated he would end the tax on Social Security benefits alongside ending taxes on tips and overtime. These actions would further shrink the time to insolvency from nine to just six years. And instead of a 23% reduction in benefits by 2035, the result would be a 33% reduction in cuts to all beneficiaries, or to $1,340 per month in our previous example.
Building Your Safety Net
Financial advisors increasingly recommend a multi-pronged approach to addressing these problems.
Increase Your Retirement Savings
Financial planners now recommend increasing retirement savings by 10-15% above previous targets to account for potential Social Security shortfalls. This might mean maximizing contributions to 401(k)s, IRAs, and other retirement vehicles. So, rather than relying on the full $2,000 per month in benefits you’re promised, you should plan to receive 15% less and look for alternative ways to boost income.
Maximize Social Security Benefits
Before claiming benefits, consider working until your full retirement age or even delaying until age 70 to maximize your monthly payments. This strategy can help offset potential future reductions. For instance, a one-month delay if you’re more than 36 months younger than full retirement age gives you 5/12ths of a percent of your Primary Insurance Amount (PIA). Delaying a month past your full retirement age gives you 2/3rds of a percent of your PIA extra per month! 1
Develop Additional Income Streams
Strategic investments in dividend-focused ETFs can play a crucial role in building more retirement income outside of Social Security. For instance, if you know you’ll need $2,000 per month, but can only plan on $1,500 per month now, you may need $150,000 in dividend stocks paying an average of 4% yield to generate the extra $6,000 per year in income that you need to support your lifestyle.
Three standout options for retirement income include (check out the table for more details):
- Schwab U.S. Dividend Equity ETF (SCHD): With an impressive 11.1% annualized return over the past five years and a current dividend yield of nearly 8%, SCHD offers a compelling combination of growth and income. Its low expense ratio makes it particularly attractive for long-term holders.
- JPMorgan Equity Premium Income ETF (JEPI): Offering a higher yield of approximately 7-8%, JEPI has become popular among income-focused investors. While it may have lower growth potential than SCHD, its monthly dividend payments can help create a reliable income stream.
- Vanguard High Dividend Yield ETF (VYM): This fund provides broad exposure to dividend-paying companies with a reasonable yield and a low expense ratio, making it an excellent core holding for retirement portfolios.
Popular Dividend-Paying ETFs
These ETFs are sorted by their one-year total return, which ranges from 13% to 24%. They have AUM between $500M and $77B, with expenses running between 0.05% and 0.49%. They are currently yielding between 1.9% and 8%.
| Ticker | Name | AUM | 1-Year Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| CGDV | Capital Group Dividend Value ETF | $12.3B | 24% | 2% | 0.33% | ETF | Yes |
| RDVY | First Trust Rising Dividend Achievers ETF | $13.5B | 23.4% | 1.9% | 0.49% | ETF | No |
| DIVB | iShares Core Dividend ETF | $596M | 23.1% | 2.8% | 0.05% | ETF | No |
| VYM | Vanguard High Dividend Yield Index Fund | $76.5B | 21.2% | 2.9% | 0.06% | ETF | No |
| JEPI | JPMorgan Equity Premium Income ETF | $38B | 13.7% | 8% | 0.35% | ETF | Yes |
| SCHD | Schwab U.S. Dividend Equity ETF | $68B | 13.4% | 3.8% | 0.06% | MF | No |
Looking Ahead
While the Social Security situation may seem dire, it’s important to remember that legislative solutions are possible. However, waiting for political action isn’t a prudent strategy. Instead, taking control of your retirement planning through diversified investment strategies and increased savings can help bridge any future gaps in Social Security benefits and leave you better prepared for the future.
The key is to start adjusting expectations and planning now, rather than waiting for the trust fund depletion to become a reality. By combining Social Security benefits (even if reduced) with income from dividend-focused ETFs and other retirement savings, you can still build a secure retirement income stream that meets your needs.
1 Social Security Administration Primary Insurance Amount
