When you picture yourself in retirement, you might imagine living a pretty frugal lifestyle — one that your Social Security benefits are able to pay for. But in reality, retiring on Social Security alone is a dangerous move. Here’s why.
1. Benefits could shrink
The average senior on Social Security is in line for a monthly benefit of $1,657 in retirement come 2022. But in time, those benefits could get cut across the board.
Social Security is expected to spend more in the coming years than it collects in revenue as baby boomers stage a mass exodus from the labor force and too few workers come in to replace them. The program can tap its trust funds to make up that shortfall for a while, but by 2034, those cash reserves are expected to run dry. Once that happens, significant benefit cuts could be on the table.
You may be expecting a certain benefit from Social Security based on your wage history. But if lawmakers don’t put their heads together and come up with a way to address Social Security’s financial woes, then you may end up with a lot less money than anticipated.
2. Your benefits won’t replace your entire paycheck
Even if Social Security benefits aren’t slashed in the future, they’ll still only replace about 40% of your pre-retirement paycheck if you’re an average earner. Now, you may have every intention of living a pared-down lifestyle once your career comes to an end. But do you really think you’ll get away with spending less than half of your former income?
That’s a really tall order given how expensive healthcare alone can be in retirement. And that’s really not a negotiable expense.
3. Benefits generally can’t keep up with inflation
Last year, the Senior Citizens League reported that Social Security benefits have lost a whopping 30% of their buying power since 2000. And a big reason boils down to stingy cost-of-living adjustments, or COLAs.
Each year, benefits are eligible for a COLA, the purpose of which is to help ensure that seniors on Social Security can maintain their buying power as living costs rise. In 2022, seniors will be getting their largest raise in several decades — a 5.9% increase. But in recent years, COLAs have come in at much lower levels, causing seniors to fall behind.
Social Security COLAs also largely fail to account for healthcare inflation, which impacts seniors substantially. And even generous COLAs can lose their impact when Medicare costs rise a lot and eat into them. Such is likely to be the case in 2022 as Part B premiums soar.
There’s nothing wrong with factoring Social Security into your retirement plans or even relying on it as a substantial source of income. But don’t make the mistake of thinking you’ll do just fine if those benefits are all you have to live on. Instead, do your best to build a retirement nest egg, and if it’s too late for that, plan to work part-time as a senior to give yourself a more generous income than what Social Security alone can provide.
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