Almost 100 million people are making a huge mistake when it comes to retirement planning. A recent Nationwide Financial study found that around 40% of adults across America believe that Social Security benefits alone should be sufficient to live on.
The millions of Americans who harbor this belief are likely to find themselves in dire straits if they base their savings goals around this misconception. Here's why.
Image source: Getty Images.
Americans are overestimating Social Security's role in retirement
Future retirees anticipating they can rely solely on Social Security will likely be surprised to find out how low their benefits end up being once they start getting their checks.
See, while the maximum Social Security benefit is $3,895 in 2021, very few people receive anywhere close to that amount. The average benefit is just $1,558 for retired workers. And average benefits will be much lower for those who claim Social Security checks early, which is very common since most people need these benefits while they're still in their early 60s. Claiming early reduces Social Security income because while benefits become available as early as age 62, retirees who claim ASAP are hit with early filing penalties and miss out on the chance to earn delayed retirement credits.
Obviously, if you're likely to get less than $19,000 in retirement income from Social Security, it should quickly become clear that counting on these retirement benefits as your sole income source is not going to work out.
The reality is, though, that they were never meant to be your only source of funds. Social Security was designed to support you in conjunction with savings and a pension, so it replaces only about 40% of pre-retirement earnings.
How to supplement Social Security
You don't want to be among the 100 million Americans who are in for a rude awakening when you try to live on Social Security checks alone. So, it's crucial you understand the truth about these benefits and start making plans ASAP to supplement them.
One option to do that is to find an employer that offers a defined benefit pension. That's a pension plan that guarantees you a set amount of income as a retiree, with your monthly benefit based on factors such as how long you worked for the company and how much you earned. It can be really difficult to find a job that provides this kind of pension, though. If you're hoping for one, your best bet may be to look for work with the government, as you're more likely to get a pension from a state or federal employer than from a private-sector company.
The better bet may be to start investing ASAP to build your own retirement nest egg. You can do that by putting money into a workplace 401(k), if your employer offers one, or by investing in an individual retirement account (IRA) with a brokerage firm of your choosing.
You should figure out how much income you'll need, sign into your Social Security account to get a realistic idea of what these benefits will provide, and then plan to save enough to cover the shortfall. By taking these steps, you can ensure you won't struggle financially as a retiree.
