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3 Reasons You Can’t Bank on Social Security Alone for Retirement

By Maurie Backman - Oct 20, 2019 at 6:48AM

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Relying on Social Security as your only retirement income source is a big mistake.

In case you didn't hear the news, Social Security recipients aren't getting a very generous raise for 2020. The upcoming cost-of-living adjustment (COLA) amounts to a paltry 1.6%, which is only slightly more than half of what 2019's COLA looked like.

But while many seniors are no doubt stressing out over this update, for some -- namely those who don't rely so heavily on Social Security -- it's probably no big deal. That's because seniors with multiple income streams can tap sources outside of Social Security to pay the bills, and their ability to keep up with rising costs doesn't hinge so heavily on annual COLAs. If you're not planning on different income streams in retirement, here are a few reasons to rethink that plan and stop assuming that Social Security will suffice on its own.

Social Security card


1. Those benefits will replace just a fraction of your income

Social Security will replace about 40% of the average earner's preretirement income. But most seniors can't live on just 40% of what they're used to. Even if we account for a modest dip in living expenses due to factors like mortgages being paid off or commuting costs going away, let's not forget that some expenses, like healthcare, tend to rise in retirement. All told, seniors typically need at least 70% of their former income to live comfortably unless they make major lifestyle adjustments. You'll probably need more than Social Security once your career comes to a close.

2. Benefits may be reduced in the future

Despite rumors that point to Social Security's impending demise, the program is, thankfully, by no means on the verge of disappearing. But here's what is happening: Social Security expects to owe more money in benefits than it will receive in revenue in the coming years, and once its trust funds run out, which could happen as early as 2035, benefits could be reduced by as much as 20%. That's bad news for those seniors who depend on those benefits for the bulk (or all) of their income, and it's yet another reason Social Security can't be your sole income source once you leave the workforce.

3. Social Security does a poor job of keeping up with inflation

Those COLAs we talked about earlier? They're designed to help seniors retain their buying power in the face of inflation, but they tend to fall short in that regard. Some years, they're nonexistent.

The Senior Citizens League estimates that Social Security recipients have lost 33% of their buying power since 2000, largely due to rising healthcare costs during that period. Part of the problem stems from the way COLAs are measured -- they're based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which doesn't accurately reflect rising costs that are specific to seniors. The point, however, is that if you fall back on those benefits alone in retirement, you're likely to lose purchasing power year after year.

Have another income source

Having income outside of Social Security can help ensure a decent lifestyle during retirement. In the absence of an employer pension, that income source should ideally come in the form of independently accumulated retirement savings, such as those housed in an IRA or 401(k). Working part time is an option to consider, too, especially with the gig economy offering flexible, nontraditional opportunities to earn money without resorting to backbreaking labor or tedious office employment. No matter which option you secure, be sure to have a backup plan rather than depending on Social Security to get you through retirement all by itself. If you don't plan ahead, you'll likely wind up cash strapped and bitterly disappointed.

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