Some people neglect their retirement savings because there simply isn't enough money left over for IRA or 401(k) contributions after accounting for their various expenses. But for others, it's more of an active decision -- one that centers on choosing to fall back on Social Security instead.
Now Social Security may end up paying you a decent monthly benefit. But before you decide to make that your only source of income during your senior years, be sure to run through these essential questions.
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1. Can I live on 40% of my former income or less?
Most seniors need around 70% to 80% of their former income to maintain a comfortable lifestyle. If you're planning to live very frugally in retirement, you might manage to get by with a smaller percentage of replacement income.
But can you really make it on just 40% of your pre-retirement earnings? If you don't save for your senior years and leave yourself with Social Security only, that's the amount of replacement income you may be looking at. And that assumes no benefit cuts.
Right now, benefit cuts are a distinct possibility for Social Security, since the program's trust funds are expected to run out of money by 2035. Once that happens, the program may have to slash benefits, at which point yours might replace less than 40% of your former earnings.
All told, retiring on Social Security alone means taking a very severe pay cut. You'll need to really make sure you can pay for essential expenses and still maintain a decent quality of life with that sort of income hit.
2. Am I planning to delay my filing?
While Social Security may not replace your former paycheck in its entirety, there are steps you can take to score a higher monthly benefit. And one of those is delaying your filing past full retirement age (FRA).
At FRA, you can claim your full monthly benefit based on your personal wage history. FRA kicks in at age 67 for those born in 1960 or later.
Meanwhile, for each year you delay your filing past FRA, your benefits increase by 8% on a permanent basis. At age 70, this incentive goes away. But all told, if your FRA is 67, you could give your benefits a 24% boost by delaying your filing until age 70. And if you're planning to go that route, living solely on Social Security may be more feasible.
Should you rethink your plans?
Some people don't realize that Social Security won't replace their former income in full until it's too late. Now that you're aware of that fact, you may want to rethink your plans to retire solely on Social Security.
If you're close to retirement, you may not have all that much time to build a nest egg. But you can try to save something, and also, delay your workforce exit a few years to boost your cash reserves.
Working part-time during retirement is another option worth considering. The income you receive from a job could supplement your Social Security benefits nicely and compensate for a lack of savings. Plus, having a job will give you something to do with your newfound free time. And that alone makes working a good option.
