Social Security provides vital benefits to countless retirees, but many people overestimate how far those payments will really go. According to a 2016 Transamerica study, 34% of baby boomers expect Social Security to serve as their primary source of income in retirement. But that's a problem, because in reality, that's just not what Social Security was designed to do.

Contrary to what many believe, Social Security isn't meant to cover retirees' living costs in their entirety. It's not even meant to cover most of them. Those monthly benefits will only replace about 40% of the average worker's pre-retirement income. Most retirees, though, will end up needing a minimum of 70% of their previous income to stay afloat financially. Many will need as much as 80% or 90%, and a number of seniors will actually need 100% of their former income, if not more.

Serious baby boomer


Relying too heavily on Social Security is a dangerous move for those nearing retirement. And if baby boomers don't take steps to ramp up their savings, they face a very rocky road ahead.

Yes, you might need more money in retirement

We're often led to assume that our living costs will go down once we stop working, but in reality, the only expenses you can definitively kiss goodbye once you leave the workforce are commuting, dry cleaning, and other such direct costs of holding a job. Unless you've paid off your mortgage in time for retirement (which an estimated 30% of seniors haven't), there's no reason to think your housing costs will drop in retirement. If anything, they might climb as your property ages and requires additional maintenance.

Then there's healthcare, which is the one expense that almost universally goes up in retirement. The latest projections show that a healthy 65-year-old couple might spend as much as $377,000 on medical costs in retirement, and that figure doesn't even include long-term care. When you break that cost out over 25 years (which is reasonable, as many seniors are living longer than that), we're looking at $628 per month, per person, in healthcare. Given that the average Social Security recipient today collects just $1,360 a month in benefits, those without independent savings might spend close to half of their income on medical care alone.

But it's not just housing and healthcare you'll need to worry about in retirement. Because retirees have loads of free time on their hands, they're likely to spend a good chunk of money keeping themselves occupied. In fact, the Bureau of Labor Statistics reports that seniors aged 65 to 74 spend an average of $2,988 per year on entertainment per household, which is over $100 more per year than pre-retirees aged 55 to 64.

Add these various costs together, and it's no wonder 46% of households wind up spending more money, not less, during their first two years of retirement. And it's not just the wealthy who are living it up. According to the Employee Benefit Research Institute, which provided this data, these spending patterns are consistent across all income levels.

What this data also tells us is that even if you're the most frugal human being in the world, to think you'll get by on just 40% of your pre-retirement income is dangerous.

Build your savings and have a backup plan

If you're among the countless Americans who are behind on savings, now is the time to take action. Assuming you still have some working years left, you can start by maxing out your retirement plan contributions. Workers aged 50 and older can put up to $6,500 a year into an IRA and $24,000 into a 401(k). Max out an IRA over a five-year period, and you'll be looking at an additional $36,000 in retirement income, assuming your investments generate a conservative average return of 5% per year. Max out your 401(k) for five years, and you'll be sitting on $132,000 instead (which, incidentally, brings you pretty close to $147,000, which represents the median household savings amount among boomers).

In addition to saving more, come up with a contingency plan in case your career is unexpectedly cut short. An estimated 60% of Americans retire earlier than planned due to job loss, health issues, or the need to care for a spouse or dependent. Yet Transamerica reports that only 25% of boomers have a backup plan for retirement income if they're unable to work until their target age.

Your backup plan might involve downsizing your home, working part-time in retirement, or changing your picture of what retirement looks like. You may need to scrap your plans to travel and rely on local entertainment if you're unable to work -- and save -- as long as planned. But no matter what strategy you decide to fall back on, play around with different scenarios and find ways to deal with them -- before you're caught off-guard.

While there's no reason not to factor in Social Security when calculating your retirement income, don't make the mistake of thinking it will cover all, or even most, of your bills. The sooner you accept the limited buying power those benefits will give you, the better positioned you'll be to compensate while you still have an opportunity to do so.