I was talking to some college friends about retirement. For context, we’re all several decades away from that milestone, so it’s not like we’re in the process of mapping out concrete plans. But the topic of retirement savings came up at one point, and that quickly lead to a discussion about Social Security.
In a nutshell, a few of my friends are convinced that Social Security won’t be around at all once they retire, so they’re making an effort to build up nest eggs they can tap in its absence. Because I write about Social Security all the time, I know enough not to worry about the program going away completely. Rather, what’s more likely to happen is that Social Security will end up cutting benefits.
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But even that’s not set in stone. So not all that surprisingly, some of my friends made a point to say that they’re not so focused on saving for retirement because they have faith that Social Security will stick around.
To be fair, a big reason these people aren’t able to fund their nest eggs so robustly is that they have kids and a mortgage and a host of expenses. But I worry that these friends of mine who are counting on Social Security will experience a very unpleasant surprise once their retirement rolls around.
Know what your benefits will pay you
I don’t think it’s a bad thing to plan to rely on Social Security income in retirement. But when I asked my friends, who are still counting on the program, how much replacement income they think they’ll get out of it, their answers ranged from 80% to 100% of their current paychecks. And that’s just way off base.
In a best-case scenario, Social Security will replace 40% of their current income. And that’s not even all that likely since I’d venture to guess that as East Coast dwellers, my friends probably earn more than an average salary. (That 40% target is for workers earning a more typical national wage.)
As such, I’ve told those friends that they may end up surprised — in a very bad way — once retirement rolls around. And I’ll continue to nag them to ramp up their savings so they don’t have to end up living in my basement once they retire and find themselves cash-strapped.
An important reality check
To expect 100% replacement income out of Social Security is just plain unrealistic. If you go into retirement with that expectation, you might end up unpleasantly surprised.
Instead, know this: Social Security, as of now, will replace about 40% of your paycheck if your wage is roughly on par with the national average. If you’re a higher earner, you’ll get less replacement income out of Social Security. And if benefits are cut, you’ll get even less. Knowing this might inspire you to focus on your nest egg — and make an effort to build up the savings you need to enjoy your post-career years.
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