The 1 Thing Too Many People Get Wrong About Social Security

Social Security pays a monthly benefit to millions of older Americans today. And if you’ve been working and paying into the system for years, then chances are, once your retirement rolls around, you’ll be entitled to a monthly benefit.

Now you might assume that you don’t have to focus so much on retirement savings since you’ll have Social Security income to fall back on. But that line of thinking could really come back to bite you.

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Don’t bank too much on Social Security

Despite rumors of Social Security being on the verge of bankruptcy, the program is not actually in danger of going away. Right now, the worst-case scenario future recipients are looking at is benefit cuts, and even those aren’t guaranteed to happen.

Many seniors today get most or all of their income from Social Security. If lawmakers were to do nothing about the program’s pending financial shortfall and let benefit cuts happen, they’d end up with a major poverty crisis among the elderly to manage. So while there’s not a specific plan in place currently to prevent reduced benefits from becoming reality, we can hope that lawmakers will come up with one in time.

With that said, it’s still a bad idea to assume that you can retire on Social Security alone. Many people are under the impression that those benefits will replace their pre-retirement earnings in full. In reality, those benefits will only replace about 40% of your pre-retirement wages, and that assumes you’re an average earner.

If you earn a higher income than the typical American, you’re likely to find that Social Security replaces an even smaller percentage of your wages. And again, this assumes no benefit cuts.

Now, think about your living expenses today. You may be able to reduce them to some degree once you retire — for example, downsize to a smaller home and get rid of one vehicle if you’re a two-car household. But does a 60% pay cut really seem feasible to you? If not, then you’d better not plan on retiring on Social Security alone.

Save now, have more flexibility later

It’s perfectly fine to count on getting some income from Social Security in retirement. But those benefits shouldn’t be your only income source. So if you’ve yet to start building a retirement nest egg, do it now.

If you’re 25 years away from retirement and sock away $500 a month over the next two decades, you’ll build a nest egg worth around $439,000, assuming your savings generate an average annual 8% return. Considering that’s a bit below the stock market’s average, that’s a reasonable return to plug in for an investment window that long.

Perhaps the biggest myth attached to Social Security is that seniors commonly live comfortably in retirement on those benefits alone. That may be true for some people, but it’s hardly the case universally. The sooner you recognize that, the more steps you can take to build savings of your own so you don’t have to struggle financially later in life.

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