Social Security pays millions of seniors a monthly benefit, and for many, that income is the only money they have access to during retirement. But going a similar route could be disastrous for you. Here's why.
1. You won't get a lot of replacement income
The amount of replacement income you need during retirement will hinge on factors such as the lifestyle you expect to lead and the ways you'd like to occupy your time. Someone who wants to hang on to a larger home and do a lot of travel is apt to need more income than someone who intends to downsize and spend time volunteering locally.
But as a general rule, you should expect to need about 70% to 80% of your former earnings to live comfortably as a retiree. If you're an average earner, Social Security will replace about 40% of your pre-retirement wages. So clearly, if you want to get to that 70% to 80% mark, you'll need other income sources, like savings, a pension, or a part-time job.
Now, you may be thinking you'll get by OK on 40% of your former earnings. But before you get too confident, map out a sample budget to see if the numbers actually work.
If you make $5,000 a month now, see if it's actually possible to live on $2,000 a month. And if not, start making a plan to supplement your retirement income so you don't end up cash-strapped.
2. Benefits cuts could come down the pike
Social Security is facing a revenue shortfall that could result in benefit cuts in the not-so-distant future. As already mentioned, if you're an average earner, you can expect the benefits you collect in retirement to replace about 40% of your former wages. But if benefits are slashed, Social Security might provide even less replacement income.
That's really all the more reason to work on building a nest egg and take other steps to shore up your retirement finances. We can't say with certainty whether Social Security will end up cutting benefits and how extreme those cuts will be, but it's important to be prepared for that possibility.
Don't set yourself up for a world of stress
Retiring on Social Security alone could make your senior years miserable -- and you deserve better. Instead, be realistic about the amount of income your benefits will give you and try to find ways to supplement those benefits.
If you're still working, you have an opportunity to contribute money to an IRA or 401(k) you can withdraw from down the line. And that's an easy way to avoid some of the financial stress so many Social Security beneficiaries experience today.
Even if you're at the tail end of your career without much of a nest egg, all isn't lost. You could delay retirement, or transition to part-time work and use the opportunity to build up some amount of savings. You might even land in a position where you can delay your Social Security filing, thereby locking in a higher benefit than you'd get by signing up at full retirement age or earlier.
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