More than 64 million Americans will receive some form of Social Security benefits in 2019, according to the Social Security Administration. And of those people receiving benefits, nearly half of married couples and roughly seven in 10 unmarried beneficiaries will depend on those benefits for at least 50% of their income.
In other words, Social Security benefits can make or break your retirement.
Now, depending on your benefits in some capacity isn't necessarily a bad thing. While you shouldn't rely on that money as a primary source of income, it does function as a nice cushion to supplement your own retirement savings. The problem is that most people don't have a clue how much they're going to be receiving in benefits during retirement.
Through the mySocialSecurity program, the Social Security Administration provides earnings statements to give workers an idea of how much income they earned that year and, based on those earnings, what their monthly Social Security checks may look like once they're old enough to start claiming benefits. However, only 43% of those who are registered online to receive those statements actually accessed them in 2018, according to a report from the Social Security Administration -- which is a dramatic decrease from the 96% of people who accessed their statements in 2012. That means the 57% of people who aren't checking their earnings statements may be unaware of what they could be receiving in benefits in the future.
If you're still a few decades away from retirement, you may think that you don't need to worry about Social Security right now. But because your benefits will make up at least a portion of your retirement income, in order to figure out how much you need to save for retirement, you need to know how much you'll be receiving from Social Security.
Figuring Social Security into your retirement number
Before you can start saving for retirement, you need a goal in mind. Enter your retirement number -- or the total amount you should have saved by the time you retire. The easiest way to find this number is to play around with a retirement calculator, which will give you a ballpark estimate of how much you may need. (Keep in mind, though, that no calculator will give you a 100% accurate answer, so try out a few different ones to get a range of possible numbers to aim for.)
Another quick and easy way to get a rough estimate of how much you need is to use the rule of 25. It's based on the 4% rule, which, in a nutshell, says you can withdraw 4% of your retirement fund the first year after you retire, then adjust that number every year following to account for inflation. The rule of 25, then, essentially allows you to work backwards. So if you know you'll need around $50,000 each year in retirement, multiply that by 25, and you'll need a nest egg worth around $1.25 million.
That's an intimidating number, even for super savers. However, that number simply accounts for the total amount you'd need to get through retirement -- it doesn't account for the portion of your income that will come from Social Security.
Say, for instance, you estimate that you'll be receiving around $1,800 per month -- or $21,600 per year -- in Social Security benefits. If you know you'll need around $50,000 each year to cover all your expenses and Social Security will cover $21,600 of that, that means you'll only need to account for the remaining $28,400 per year on your own. Multiply that by 25 to get a new retirement number, and it comes out to around $710,000. While that's still a lot of money, it's much less overwhelming than $1.25 million.
When you shouldn't count on Social Security
All of that being said, it's still a good idea to save as much as you can on your own so your retirement dreams aren't dashed in the event that you don't receive as much as you'd like in Social Security benefits -- because there's a good chance that may happen.
Because baby boomers are retiring in droves, there's more money flowing out of the system in benefits than there is coming in in the form of taxes. As a result of this shortage, benefits may need to be cut by roughly 20% by 2034, according to the Social Security Administration.
Does that mean you can't rely on Social Security at all? No. The system won't collapse completely (assuming everyone keeps paying their taxes), and you'll still receive some benefits -- it just may not be what you were expecting. So as you're calculating your retirement number and figuring out how much you need to save, keep in the back of your mind that you may be receiving less than you'd planned from Social Security.
Also, checking your Social Security statements may work as a wake-up call for those who aren't doing enough to save. If you're putting off saving because you're expecting Social Security to take care of all your financial needs in retirement, you may be in for a rude awakening when you see that your estimated monthly benefits very likely aren't nearly enough to cover all your expenses.
Saving is hard enough as it is, but Social Security makes it a little easier. Although it's not the wisest idea to depend on your benefits for a majority of your retirement income, there's no harm in being strategic about how you plan for retirement so you're maximizing your savings.