If you're like most people, your retirement fund probably isn't as healthy as you'd like it to be. Only a quarter of baby boomers think they're doing a good job of preparing for retirement, according to a survey from the Insured Retirement Institute, and a whopping 42% of boomers don't have anything saved for their golden years.
That's when Social Security typically comes into play. If you don't have enough savings of your own to cover all your expenses, you're likely hoping Social Security will pick up the slack.
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While Social Security benefits are a great addition to your retirement income, they shouldn't be your primary source of income. However, 49% of baby boomers say they expect Social Security to be their main source of income during retirement, according to a survey from American Advisors Group, and only 12% said they'd get most of their retirement money from their personal savings.
There's nothing wrong with relying on Social Security benefits to some degree, but there are serious problems with depending on them for the bulk of your income.
The consequences of relying too heavily on Social Security
Using Social Security checks to cover most or all of your expenses may sound like a good idea in theory -- at least until you realize how much you're actually receiving each month. The average check comes out to around $1,300 monthly, according to the Social Security Administration, and your benefits could be reduced if you claim early.
The only way to ensure you receive the full amount you're theoretically entitled to is to claim at your full retirement age (FRA), which is somewhere between 66 and 67, depending on the year you were born. Claim before that (as early as age 62), and your benefits will be reduced by up to 30%. So if you would have been receiving $1,300 by claiming at your FRA and your benefits are slashed by 30%, that leaves you with just $910 per month -- which isn't much to live on.
Furthermore, your benefits could potentially be reduced even more in the relatively near future due to budget cuts. Right now, with roughly 10,000 baby boomers reaching retirement age every day, there's more money flowing out of the Social Security system than coming back in. The Social Security Administration predicts that the cash reserves will run dry by 2035, and there will only be enough money coming in to cover around three-quarters of scheduled benefits. In other words, unless Congress comes up with a solution before 2035, benefits could be cut by up to 25%.
When Social Security is your primary source of income and you're already pinching pennies to get by, a 25% cut in benefits could wreck your budget. Without personal savings to fall back on, you'll either need to make some financial cuts or try to find a way to bring in additional income.
Maximizing your retirement income
The best way to avoid having to rely on Social Security is to beef up your retirement fund while you still can. If you wait until you're already retired and struggling to make ends meet with Social Security alone, it may be too late to fix the problem.
There's no magic bullet to saving more for retirement, but there are a few ways to make it a tiny bit easier. For example, if you have a 401(k) that offers matching contributions from your employer, save enough to earn the full match. Anything less and you're leaving free money on the table, and those employer contributions can potentially double your savings.
Also, keep a close eye on where your money is going. Without a detailed budget, it's easy to lose track of your finances and not realize exactly how much you're spending each month. Small, consistent expenses -- like buying lunch at the office every day or grabbing a candy bar every time you stop at the gas station -- can be particularly harmful because a few dollars here and there don't seem like much. But when you're spending a few dollars on various little things every day, it can easily add up to hundreds of dollars each month. If you're struggling to save, it may feel like you simply don't have any extra money to put toward retirement when, in reality, you're spending more than you realize each month.
Another way to maximize your income in retirement is to be strategic about when you claim Social Security. While your benefits will be reduced if you claim before your FRA, if you wait until after that age to claim (up to age 70), you'll receive up to 32% extra each month on top of your full benefits -- and you'll receive those bigger checks for life.
Delaying claiming benefits has two major advantages. First, there's the boost in benefits you'll receive each month. Second, if you hold off on retiring as well, that will give you more time to save and build a healthier nest egg. So not only will you have a fatter retirement fund, but you'll also be receiving bigger Social Security checks each month -- a retirement win-win. If the Social Security Administration does end up cutting benefits, you may still see a 25% reduction. But if you're already earning around 30% more by waiting to claim, those cuts won't be quite as painful.
Social Security is a wonderful retirement tool and a great way to supplement your income in retirement, but depending too much on it does have its downfalls. While it may be possible to get by on Social Security alone in retirement, it's better to be safe than sorry.
