An estimated 59% of retirees today regard Social Security as a major source of income, reports the Employee Benefit Research Institute. But that's troubling for a number of reasons.
First, those benefits are only designed to replace about 40% of the average wage earner's pre-retirement income. Most seniors, meanwhile, need more like 70% to 80% of their former earnings to live comfortably, and those who bank mostly on Social Security are often forced to make unwelcome lifestyle changes later in life.
Secondly, while Social Security has enough revenue at present to keep up with scheduled benefits, the program anticipates a future shortfall that could cause those payments to be slashed to the tune of 20%. And that milestone isn't all that far off -- recent estimates put it at 2035.
If you're banking on Social Security to fund your golden years, you should know that the program will be around in some capacity once you leave the workforce, even if you're only just now kick-starting your career. Furthermore, the aforementioned reduction in benefits may not even happen if lawmakers step in with a fix. And to be clear, it's in their best interest to devise a solution so that current retirees who count heavily on those benefits don't wind up tossed dangerously below the poverty line.
But despite all of this, it still pays to write off Social Security in the course of your retirement planning. That's right: Forget those benefits exist, and assume they'll amount to nothing. You'll be thankful for it later on.
Go it alone, without Social Security
The primary reason to forge forward with retirement planning without accounting for Social Security is this: If you do, you'll be more motivated to save independently.
Or, perhaps "scared into saving" is a more accurate description, but the point is that if you fail to take any comfort in the promise of benefits whose value you can't reasonably predict if you're 20, 30, or 40 years away from retirement, you might, in turn, push yourself to build a nest egg that leaves you completely nonreliant on Social Security down the line.
Of course, saving money is not an easy thing, especially when immediate expenses occupy the bulk of your income. But if you make modest changes to your lifestyle, you may be surprised at how much money you eke out.
Case in point: Dining out a few times less each month, canceling a gym membership or subscription service you rarely use, and driving a used car instead of a newer one could easily free up $300 a month in your budget. If you were to then stash that money in a retirement savings plan like an IRA or 401(k), and invest it at an average annual 7% return over a 40-year time frame, you'd wind up with roughly $719,000 in savings. That's a lot of money to carry into your golden years. Boost your monthly savings contribution to $400 a month, and you'll be sitting on $958,000 instead. And if you're wondering about that 7% return, it's several percentage points below the stock market's average, and more than reasonable over a lengthy investment window.
Of course, it's certainly possible to save money all the while assuming that Social Security will come through for you in retirement to some extent. But if you force yourself to write off those benefits in your head, there's a greater chance you'll push yourself to save aggressively. And once that happens, you'll be able to approach retirement from a place of confidence without having to worry about what the future actually holds for Social Security.