Key Points
-
Learning the ins and outs of how Social Security works can take a lot of time.
-
Before you retire, the most important thing to understand is the role those benefits should play in your total income picture.
-
When you’re new to the workforce, Social Security is something you might hear about but not really focus on. You may be aware that you’re paying taxes to fund the program, but that’s probably about it.
As you get closer to retirement, you may be inclined to read up on Social Security a bit more. And to be clear, the more you know about Social Security, the greater your chances of being able to maximize your benefits and file at the right time.
Missed AI’s “Act 1”? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn’t buy Nvidia in 2005. But according to our analysts, we’re only at the end of “Act 1″—the R&D phase. “Act 2” is the global rollout. Continue »
Image source: Getty Images.
But if there’s one thing you absolutely need to understand about Social Security ahead of retirement, it’s the role those benefits should play in your senior income. And there’s one key figure to focus on.
Expect Social Security to replace 40% of your income
Many people go into retirement expecting that Social Security will take the place of their paychecks in full. But that’s way off.
If you earn an average wage, you can expect Social Security to replace about 40% of it in retirement. If you’re a higher earner, Social Security might replace an even smaller percentage of your pre-retirement paycheck.
That’s a crucial thing to realize, because it’s not an easy thing to absorb a 60% pay cut. And if you don’t save for retirement or come up with another way to supplement your Social Security checks, you could end up struggling financially once your career comes to an end.
Make Social Security one part of your plan
Your retirement income should not hinge solely on Social Security. Even if you’re willing to cut back on spending to a notable degree, you might still struggle to retire on those benefits alone.
Remember, certain retirement expenses are non-negotiable. You can’t not have a home, pay for healthcare, or put food on the table.
Even if Social Security pays you enough to cover your essential costs, do you really want a retirement that’s devoid of paid entertainment? Will you never want to leave the house to see a movie, meet friends for dinner, or take a trip?
If you don’t have more than Social Security to rely on, that may become your reality. So if there’s one thing to get right about Social Security ahead of retirement, it’s the 40% income replacement rule. Once you recognize that you’ll need outside income, you can create a savings and investment strategy that allows you to meet your goals.
And to that end, the sooner you start saving, the easier it might be to accumulate the supplemental income you need. Contributing $500 a month to an IRA over 40 years could result in over $1.5 million if your investments deliver an 8% yearly return, which is below the stock market’s average.
And as though as it may be to part with that money, just remember that if you don’t, you may be looking at a serious pay cut later.
The $23,760 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income.
One easy trick could pay you as much as $23,760 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Join Stock Advisor to learn more about these strategies.
View the “Social Security secrets” »
The Motley Fool has a disclosure policy.
