Do you know what role Social Security will play in your retirement? If you're like many Americans, you might not be aware of the reality of this important program even as you look forward to receiving benefits from it.
Not understanding how Social Security works could be a costly mistake. In particular, there's one key fact every future retiree needs to know as early as possible.
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This is a must-know Social Security number
Everyone planning to rely on retirement benefits needs to know one key Social Security number: $1,657.
This is the average benefit a retiree will receive in 2022. It's up quite a bit from 2021, when it was just $1,565. This year's average is much higher because retirees will receive a 5.9% cost of living adjustment in 2022 due to high inflation.
But chances are good it's quite a bit below what your current monthly income is if you're still working -- and far below what your monthly expenses add up to, especially if you're in or nearing retirement. And that's why this number is so important.
The sad reality is, the average Social Security benefit is going to provide an annual income of only $19,884 in 2022. So those who rely solely on that benefit will end up living just above the poverty level.
Those who earned more than an average salary over their career will have a higher benefit. But since your Social Security check is based on your wages over a 35-year career, you'll need to be an above-average earner for a long time to get a significantly higher benefit. And if you earn a below-average salary over your career, your monthly benefit is going to be lower.
Why is the average Social Security benefit so low?
It's crucial that future retirees realize just how low the average Social Security benefit is, and that it will always be far below what most people need for a comfortable quality of life. And that's because Social Security is intended to replace 40% of pre-retirement earnings, rather than the 80% or more that most people require to maintain their standard of living in retirement.
If you're unaware of this, you could end up with too little supplementary income to add to your Social Security benefit and support yourself as a retiree. This is true even for high earners with an above-average benefit, since they'll probably be used to a higher standard of living and will have more expenses even in retirement.
Since you'll probably need to replace 40% of what you made before retirement, you should plan accordingly when setting retirement goals and begin working toward building this nest egg ASAP.
