You may not know exactly what your retirement expenses will look like when you're in your 30s, 40s, and 50s. At that point, retirement is still pretty far off, and it's hard to predict exactly what sort of lifestyle you may want to lead.
But one thing you can probably bank on is needing a fair amount of income to cover your future living costs. And if you're wondering if Social Security will pay for those expenses in full, well, you may not like the answer.
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Don't bank too heavily on those benefits
Many seniors get into trouble when they enter retirement with little money in savings and expect Social Security to pick up the slack. In reality, Social Security will replace about 40% of the typical worker's pre-retirement paycheck. But that's actually not such a great thing, seeing as how most seniors need around 70% to 80% of their former income to maintain a comfortable lifestyle.
Of course, the amount of replacement income you wind up needing will hinge on factors like where you end up living, what type of home you end up in, and how you spend your days. But it's fair to assume that you won't manage to get by on just 40% of your previous income -- which is why having income outside of Social Security is so important.
That 40% replacement income target assumes that Social Security benefits also remain payable in full. There are already talks of substantial benefit cuts due to the program's impending financial shortfall. And while lawmakers do have time to implement solutions to that, so far, no action has been taken. As such, current and future Social Security recipients have to brace for the possibility of lower benefits than expected.
Line up a number of income streams
Clearly, even in a best-case scenario of no benefit cuts, Social Security won't cover your retirement expenses in full. The question is, what will you do about that?
Ideally, you'll line up a few different income streams so you have access to the money you need to maintain a decent quality of life. One income stream to focus on during your working years is savings -- the money you sock away in an IRA or 401(k) plan. Contributing even modest amounts through the years could have a big effect if you invest your savings and start building a nest egg from a fairly young age.
Another smart move is to set yourself up with investments that pay you regularly. These include dividend stocks and municipal bonds.
If you're nearing retirement without much savings, and you haven't set yourself up with income-paying investments, then working during retirement is an option worth considering. You don't necessarily have to put in 25 hours a week at a job you'll hate. Rather, consider turning a hobby into an income stream -- such as selling homemade furniture if you like woodworking or offering personal chef and catering services if you enjoy spending time in the kitchen.
If you plan to retire on Social Security alone, you might face a serious income shortfall. The sooner you realize that, the more steps you can take to avoid that fate.
