Many seniors today rely heavily on Social Security to cover their living expenses in the absence of a paycheck. But you may want to take a different approach to your retirement finances.
While Social Security is a helpful program, it's not devoid of issues. Here are three major problems you need to be aware of.
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1. Your benefits won't replace your income in full
Many people assume that the monthly benefit they collect from Social Security will be the equivalent of their former paycheck. But that's just false.
If you're an average earner, you can expect Social Security to replace about 40% of your pre-retirement income. If you're a higher-than-average earner, your benefits might provide even less replacement income, percentage-wise. If that's something you're not aware of and don't account for in the course of your retirement planning, you could wind up with a serious financial shortfall on your hands.
2. Cost-of-living adjustments often fall short
Social Security benefits are subject to an annual cost-of-living adjustment, or COLA, that's tied to inflation. But often, those COLAs don't actually manage to keep pace with inflation, even though they're based on it.
This year, for example, seniors on Social Security saw their benefits increase by 5.9%. But the rate of inflation has well surpassed the 5.9% mark for months, leaving beneficiaries at a huge disadvantage.
3. Benefits may be cut
Social Security is facing a funding shortfall. In the coming years, it expects to owe more in scheduled benefits than it collects in revenue as baby boomers exit the workforce in short order.
Social Security does have trust funds it can tap to make up for that shortfall. But once those funds run dry, Social Security benefit cuts will be on the table.
Now, remember how we just said that Social Security would only replace about 40% of your pre-retirement wages? Well, if benefits are slashed universally, those benefits will provide even less replacement income.
Furthermore, while some people are convinced that lawmakers won't let benefit cuts happen, the Social Security trustees have been warning of a shortfall for years, and so far, no one has done anything about it. So while there's a chance lawmakers will step up and prevent benefit cuts, you can't bank on that.
Don't bank solely on Social Security
There's nothing wrong with factoring Social Security into your personal retirement income equation. But don't make the mistake of thinking you can fall back on those benefits alone or expect the overwhelming majority of your retirement income to come from them.
Not only might that leave you with an inadequate amount of money as a senior, but you might really struggle financially if benefit cuts do indeed come down the pike. Instead, aim to line up other income sources to supplement those benefits, whether it's a nice IRA balance or a job that you continue to hold down in some capacity once your main career wraps up.
At the same time, it pays to start thinking about the ways you can claim Social Security strategically so you can make the most of your benefits, whatever they amount to. Waiting until retirement is right around the corner to come up with a filing strategy could lead you to succumb to stress and make what ends up being the wrong call.
