There are different income sources you might have at your disposal during retirement. These could include withdrawals from an IRA or 401(k), pension payments, and earnings from a part-time job.
But chances are, Social Security will be an essential income source once your time in the workforce comes to an end. So it's important to understand how much income those benefits will provide.
Unfortunately, many people are led to believe that Social Security will pay them enough money to replace their paychecks in full. And that's a misconception that could leave many retirees cash-strapped.
Be realistic about Social Security
If you're an average earner, you can expect Social Security to replace about 40% of your pre-retirement wages. That, however, assumes that benefit cuts don't come down the pike. If cuts are implemented, Social Security will likely replace a much smaller percentage of your former income.
In a recent report from the Nationwide Retirement Institute, 49% of Americans didn't know what percentage of their income Social Security would replace in retirement. But it's important to get a solid handle on that figure.
See, most seniors end up needing a good 70% to 80% of their former income to live comfortably once their careers wrap up. Obviously there's some wiggle room with these percentages, because seniors who choose to downsize and live frugally might manage to get by on a lot less. But for the most part, to maintain the same standard of living, it takes the bulk of your former paycheck.
Social Security, however, may only provide about half of the retirement income you need to live comfortably, based on the aforementioned percentages. And the sooner you recognize that, the sooner you can take steps to work around it — namely, by boosting your personal savings rate to build yourself a solid nest egg. If you decide you'd like to set yourself up with 80% of your former paycheck, and Social Security will only provide half that sum, with a strong enough IRA or 401(k), your savings could make up that entire gap.
In addition to knowing how much of your pre-retirement income Social Security will replace, it's also a good idea to get an estimate of your monthly retirement benefit. You can do that by creating an account on the Social Security Administration's website and accessing your most recent earnings statement.
But keep in mind that if you're only, say, midway through your career, that estimate may not be so accurate. That's because your monthly Social Security benefit will hinge on your earnings during your 35 highest-paid years in the labor force. If you only have 20 years of work under your belt, there will be a lot of data missing from that calculation.
Even so, getting an estimate of your monthly benefit could serve as a nice starting point in the course of your retirement planning. That, combined with knowing how much of your former income your benefits will likely replace, could set the stage for better planning and help you avoid a scenario where money is perpetually tight.
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