When you're preparing for retirement, it's crucial you plan to have multiple income sources.
While you'll receive Social Security benefits and should factor them in when determining how you'll cover necessities, you can't live on these retirement checks alone.
Here are three big reasons why just getting Social Security checks won't be sufficient to enjoy financial security in your later years.
1. Benefits aren't meant to be enough to live on
The single biggest reason every retiree requires additional savings beyond Social Security is that the benefits program was designed to require outside income. Social Security was never meant to be the only way retirees support themselves, and the formula used to calculate benefits ensures they won't provide enough money for seniors to support themselves.
Social Security is intended to work in conjunction with savings and a pension. So while seniors generally must replace about 80% or more of pre-retirement earnings, Social Security benefits only replace 40%. The rest of the money is supposed to come from a former employer and from withdrawals from your retirement nest egg.
Unfortunately, things have changed since Social Security was created. Now most people don't have a pension that offers another guaranteed income source. This means retirement investment accounts may very well be your only other option for funding your lifestyle once you're no longer getting a paycheck. If that's the case, you owe it to yourself to ensure they'll produce what you need.
2. Benefits aren't keeping pace with inflation
If you try to rely on Social Security benefits alone, you'll face a shortfall from the start and your situation will only get worse as you age. That's because retirement benefits aren't keeping pace with inflation, despite the fact that annual cost of living adjustments (COLAs) are built into the program's design.
These COLAs are calculated by taking into account price changes in the Consumer Price Index for Urban Wage Earners and Clerical workers. Unfortunately, this method underestimates the inflation the elderly actually experience because the price index doesn't accurately mirror their spending.
With the value of benefits eroding each year, seniors are constantly losing ground. As a result, by the time you reach late retirement, your standard of living will have fallen dramatically if you don't have plenty of other income to make up for what Social Security can't cover.
3. It's possible changes could be made that end up cutting benefits
Finally, Social Security's financial state is somewhat perilous.
While retirees aren't likely to ever stop getting benefits entirely, the trust fund Social Security relies on to cover benefits that can't be paid out of current revenue collections is undoubtedly in trouble. It's scheduled to run dry by 2034 if lawmakers don't act. If no changes are made, an automatic 22% reduction in Social Security income could go into effect.
Reaching consensus on how to fix this problem has proved to be difficult, so the federal government hasn't yet found a way to shore up Social Security. And the longer lawmakers wait to act, the harder it will be. Unfortunately, most proposals involve some changes that could end up causing a de facto benefits cut. Modifications could include raising the full retirement age, which would force future retirees to wait longer to start their checks to avoid a benefits reduction due to early filing penalties.
If you end up with lower benefits than anticipated, you'll need even more added savings to help you maintain your quality of life. So make sure you aren't planning to over-rely on Social Security benefits. Set savings goals, start working toward them ASAP, and take it upon yourself to build the security you need and deserve.