Many seniors today rely heavily on Social Security to cover their living expenses in the absence of a salary. But you may want to approach your retirement finances differently.
While Social Security is a useful program, it is not without its problems. Here are three big issues to keep in mind.
1. Your benefits will not completely replace your income
Many people assume that the monthly benefit they receive from Social Security will be the equivalent of their previous salary. But that’s just false.
If you’re an average earner, you can expect Social Security to replace about 40% of your pre-retirement income. If you’re an above-average earner, your benefits may yield even less percentage replacement income. If that’s something you’re not aware of and don’t factor in in the course of your retirement planning, you could be in serious financial shortfall.
2. Cost of living adjustments often fall short
Social Security benefits are subject to an annual cost of living adjustment, or COLA, which is linked to inflation. But often those COLAs fail to keep up with inflation even though they are based on it.
For example, social security seniors saw their benefits increase by 5.9% this year. But inflation has been well above 5.9% for months, putting beneficiaries at a huge disadvantage.
3. Benefits can be reduced
Social Security is struggling with a funding shortfall. In the coming years, it expects to pay more in scheduled benefits than it receives in revenue, as baby boomers leave the workforce in the near term.
Social Security has trust funds that it can use to make up for that shortfall. But once those funds run out, Social Security cuts will be on the table.
Remember how we just said Social Security would only replace about 40% of your pre-retirement pay? Well, if benefits are universally reduced, those benefits will yield even less replacement income.
In addition, while some people believe lawmakers won’t allow benefits to be cut, Social Security administrators have been warning of a deficit for years, and so far no one has done anything about it. So while there’s a chance lawmakers will step up and prevent benefits, you can’t count on it.
Don’t just bank on social security
There is nothing wrong with including Social Security in your personal retirement income. But don’t make the mistake of thinking that you can only fall back on those benefits or that you expect the vast majority of your retirement income to come from them.
Not only can that leave you with an inadequate amount of money as a senior, but you can really struggle financially if there are indeed cuts in benefits. Instead, try to line up other sources of income to supplement those benefits, whether it’s a nice IRA balance or a job that will keep you in some capacity once your main career ends.
At the same time, it pays to think about the ways you can strategically claim Social Security so that you can make the most of your benefits, whatever they may be. Waiting for retirement to come up with an filing strategy can cause you to succumb to stress and end up making the wrong decision.