“Why should I save for retirement when I can fall back on Social Security?” It’s a sentiment a lot of workers today uphold.
The reality is that saving for retirement is difficult. Doing so requires you to make sacrifices and, in some cases, work harder to boost your income. But if you don’t amass independent savings for retirement, you might really struggle financially during your senior years. Here’s why you truly can’t depend too heavily on Social Security alone.
1. Those benefits will only replace a fraction of your former income
Once you retire, you can generally expect to need anywhere from 70% to 80% of your former income to maintain your standard of living. The reason you won’t need to replace your entire income is that certain expenses should go away — namely, retirement plan contributions. Also, you might spend less as a senior by virtue of not having to commute to work or by having a paid-off home.
But you shouldn’t expect Social Security to pay you enough to replace 70% or more of your previous paycheck. If you’re an average earner, those benefits will take the place of about 40% of your former wages. And if you’re a higher earner, you’ll get even less replacement income from Social Security, leaving you with a pretty big shortfall on your hands.
2. Benefit cuts may come down the pike
Social Security is facing a serious income shortfall because in the coming years, it expects a mass exodus of baby boomers from the workforce. Once that happens, those workers will start collecting benefits and stop pumping revenue into Social Security in the form of payroll taxes, creating a real cash crunch.
Social Security does have trust funds it can tap when the amount it owes in benefits exceeds incoming revenue. But once those trust funds run dry, benefit cuts could be the only solution.
Meanwhile, recent estimates project that Social Security’s trust funds could run out of money in a little over 10 years. So benefit cuts may not be a far-off possibility, but rather, a somewhat near-term reality for seniors to deal with.
3. COLAs aren’t always so generous
In 2022, seniors on Social Security received a 5.9% cost-of-living adjustment (COLA) — a boost many recipients were quick to celebrate. But most years, Social Security benefits don’t get such a generous raise. And the only reason they went up so much this year is that inflation has been rampant.
In fact, since 2020, seniors on Social Security have steadily been losing buying power due to insufficient COLAs. And if you retire without enough supplemental income on top of Social Security, you might really struggle to pay your bills as living costs climb from year to year.
There’s nothing wrong with counting on Social Security to provide some of your retirement income, but should you expect to live comfortably on those benefits alone? Absolutely not. And the sooner you recognize that, the sooner you can take steps to start building a nest egg that gives you the financial freedom you deserve later in life.
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