Most retirees look forward to getting Social Security. Unfortunately, once you go to claim benefits, you could end up really disappointed with several aspects of the program.
It's better to understand the realities up front, so be prepared to face these three unpleasant surprises.
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1. Benefits only replace 40% of preretirement income
To be comfortable as a retiree, you should aim to replace around 80% of the income you were earning before leaving work -- or more. If you're hoping Social Security will do that for you, you're in for a huge financial shock. That's because benefits are designed to replace just 40% of preretirement earnings.
Social Security benefits aren't meant to be your sole source of support as a retiree. The program was designed with the assumption you would have a pension and savings too, so be sure you actually have some extra funds set aside to supplement Social Security. Otherwise, you'll have to seriously downgrade your quality of life.
2. COLAs aren't keeping pace with inflation
Since retirees rely on Social Security throughout retirement, benefits have cost of living adjustments (COLAs) built into them. Each year, data from a consumer price index is reviewed to see how much prices went up year over year. Retirees then get a raise equal to the amount of inflation the index shows.
Unfortunately, there are some big problems with this process. First, the consumer price index that was chosen to measure price growth is one that tracks the spending habits of urban wage earners and clerical workers. As a result, it underestimates how much retirees spend in certain areas that tend to experience higher inflation.
COLAs are too small in most years due to this issue, and benefits have lost about 40% of their buying power since 2000, according to an analysis by the Senior Citizens League.
The other problem is that COLAs are calculated using data from the third quarter of the year prior to the time the raise goes into effect. This year's raise was determined using data from the third quarter of 2021. Inflation kept surging after that quarter, though. So the raise this year wasn't enough. And that same effect occurs in any year when there's rapid inflation.
Since retirees are getting raises that are too small to keep pace with rising prices, your benefits will buy less for you during each year of retirement. You'll need to rely more on savings to make ends meet.
3. FRA isn't until after age 66
Finally, the last major surprise you might face is that you can't retire with full benefits at 65. Traditionally, you could, because 65 was the common full retirement age under Social Security rules. That's why many people still think of this as the classic retirement age.
But changes to Social Security to shore up its financial situation gradually pushed FRA later. It's between 66 and four months and 67 for those born in 1956 or later. This means you are either going to have to wait beyond age 65 until your FRA, or you'll have to live with reduced benefits.
And if you want to max out your benefits, you're going to have to wait until 70, since you can earn delayed retirement credits between FRA and your 70th birthday.
Getting caught off guard about when you can claim benefits or how much they are worth can lead to major financial problems as a senior. The good news is, now you know the basics so you won't find any of these facts to be unpleasant surprises as you reach your retirement years.
