What Role Should Social Security Really Play in Your Retirement?

There’s a trap that many people fall into when planning for retirement, and it’s assuming that Social Security will provide more financial stability than it actually does. In fact, many people routinely make the mistake of underfunding their nest eggs because they figure that Social Security will provide most or all of their retirement income.

So what role should Social Security play in your retirement? Actually, a smaller one than you might think.

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Social Security has its limits

In the context of retirement planning, it’s a good idea to consider your Social Security benefits one of several income sources. But they absolutely should not be your sole income source.

If you’re an average wage-earner, you can expect Social Security to replace about 40% of your pre-retirement income, assuming benefit cuts don’t come down the pike. Meanwhile, the amount of replacement income you’ll need in retirement will depend on your specific plans and lifestyle.

As a general convention, it’s a good idea to assume you’ll need 70% to 80% of your former earnings to live comfortably. But that assumes that you won’t be dumping expenses, and it also assumes that you spend the bulk of your paycheck right now.

If you expect to live more frugally in retirement, such as downsizing your home, then you may not need 70% or more of your former paycheck. And if you only spend 60% of your paycheck right now, then there’s no reason to think you’ll need a higher level of replacement income in retirement (unless, of course, you have really lofty goals).

But either way, you should do your best to figure out how much replacement income you’re targeting, and then assume that Social Security will represent part of that equation. The rest of your retirement income will need to come from other sources, such as your IRA or 401(k) plan, pension income (if you’re privy to it), or earnings from a part-time job.

Run your own numbers

It’s a bad idea to plan on having Social Security cover all or even most of your senior living costs. But will those benefits cover half of your expenses in retirement? Maybe.

Let’s assume you expect to need 80% of your pre-retirement income once you stop working because you don’t want to cut back much on spending. Social Security might get you halfway to that goal. If you can make up the rest via IRA or 401(k) withdrawals and earnings from a part-time gig you hold down, you’re all set. But the key is to make sure those other sources of income are available to you. And that may require advanced planning, such as steadily funding your retirement plan during your working years.

Social Security clearly has its limits, and if benefits are cut in the future (which is a strong possibility as of now), it will provide you with even less income. Understanding the role it will play in your retirement is something you must do ahead of time — so you can make an effort to save for your senior years and avoid a personal financial shortfall.

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