2 Things You Must Know About Social Security — Even If Retirement Is Decades Away

If you're in your 20s or 30s, Social Security may not exactly be on your radar. Not only might retirement be many decades away, but you may be more focused on other things — like paying off educational debt or saving for a home — and you're not ready to concern yourself with retirement matters.

But actually, the sooner you start learning about Social Security, the better-positioned you'll be to set yourself up for a secure retirement — even if that milestone is many years away. Here are a couple of key Social Security points you should know.

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1. How benefits are calculated

Social Security doesn't pay all seniors the same benefit. Instead, the benefit you're entitled to is based on a formula that takes your personal wages into account. So the more money you make, the more generous a benefit you might secure for yourself.

But it's not just earnings from your main job that count for Social Security purposes. If you decide to boost your income with a side job, those wages, too, will factor into your future benefits. Therefore, if you're deciding whether that extra hustle is worth it, consider the fact that it may do more than just put more money into your pocket in the near term — it may also set you up with a higher retirement-income stream.

2. What percentage of your income it's likely to replace

Many people mistakenly assume that Social Security will replace their entire paycheck once they enter retirement. In reality, you can expect those benefits to replace about 40% of your pre-retirement income if you're an average earner.

Most seniors, however, need roughly 70% to 80% of their former earnings to live comfortably. So relying on Social Security alone for retirement is a pretty poor plan.

A better bet is to consistently fund an IRA or 401(k) plan while you're working. When you're first starting out and your earnings aren't much to write home about, those contributions may be minimal. But if you increase your contributions over time, you'll ideally amass enough of a nest egg to give you the replacement income you need to enjoy retirement, rather than struggle through it.

Let's say that during your career, you end up pumping $200 a month into your retirement plan, and your investments in that plan deliver an average annual 8% return (which is a few points below the stock market's average). After 40 years, you'll have about $622,000. That's a nice sum of money to supplement your benefits with.

Get the facts now

You may think that Social Security is something you don't need to bother with for many years. While you may be decades away from being able to sign up for benefits, however, it still pays to read up on the program ahead of retirement so you know what to expect from it. It's especially important that you recognize Social Security's income-replacement limits — and come up with a plan to avoid a personal financial shortfall during your senior years.

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