The Social Security Reality Check All Future Retirees Need
If you’re planning to retire largely covered by Social Security, you’re undoubtedly in good company. Many seniors today get the bulk of their retirement income from Social Security, and many people will no doubt expect to do so in the future.
But banking your retirement on Social Security is a move that could backfire for a number of reasons. And it’s important that you become aware of them now – before it’s too late.
Social Security could let you down
You might assume that once you retire, you’ll be able to manage your bills through Social Security alone. But you should know that the average senior today gets $1,657 a month in benefits. All in all, that’s an annual income of about $20,000 per year.
Technically, that’s a few notches above the poverty line if you’re single. But that doesn’t mean that earning $20,000 a year will make for a comfortable retirement.
You also might not get $20,000 a year from Social Security. If you’re forced to retire earlier than planned, you may need to claim your benefits before full retirement age to access money to live on.
The earliest age you can register for Social Security is 62, but you may not be eligible for your full monthly benefit for another five years. The result? You could consider a 30% reduction in your Social Security income if you register as early as possible.
Additionally, Social Security may have to cut benefits across the board if lawmakers don’t find a way to pump more money into the program. Social Security’s primary source of funding comes from payroll taxes—the ones many of us groan about paying. But in the coming years, as baby boomers retire in droves, that source of income is likely to shrink, leaving Social Security with a deficit where reduced benefits may be the only solution.
Don’t risk your retirement
It’s perfectly fair to assume you’ll get it some Income from social insurance after retirement. But it’s not a good idea to assume that your accomplishments will be enough to support you in retirement. Even if there aren’t widespread benefit cuts, there’s a good chance you’ll struggle if Social Security is your only source of income.
That’s why it’s important to save for retirement while you’re working. And if that milestone is far enough away, you don’t have to part with a ton of money every month to build a solid nest egg.
If you put $250 a month into an IRA or 401(k) plan for 30 years, you’ll be left with $340,000 if your investments in your retirement plan end up having an average annual return of 8%, what a few percentage points below the stock market average. Increase your savings rate to $350 a month and you’re sitting at $476,000, assuming the same return and investment window.
Social Security may be a lifeline for many seniors today, but it should not replace personal savings. The sooner you recognize this, the sooner you can take steps to avoid a world of financial trouble later in life.