Are your parents struggling to live on Social Security alone? They may have been right about your friends in high school, but they were dead wrong about retirement.

Social Security benefits are a fabulous perk for the tax-paying American retiree. But they're not without complexity. Anyone can make mistakes that decrease their benefit substantially -- such as retiring too early or not correcting errors in their earnings history.

Yet the biggest blunder -- the issue that's hardest to overcome -- is believing that Social Security benefits alone can support a comfortable retirement. In reality, the 2019 average Social Security benefit of $1,461 is only 40% higher than the federal poverty level.

Unfortunately, too many Americans find themselves overreliant on their Social Security benefits. About one out of every five elderly married couples receiving Social Security say the benefit accounts for 90% or more of their income. Among unmarried elderly individuals receiving benefits, almost half rely on Social Security for 90% or more of their income. 

Older woman checking her finances

Image Source: Getty Images.

Why Social Security can't be your only option

Financial experts say you need 70% to 80% of your take-home pay to live comfortably in retirement. If you make $75,000 today, you should plan for an income of $52,500 to $60,000 once you're done working. Social Security alone won't cover that.

The calculations are somewhat complicated, but the Social Security benefit amount is based on your average monthly income over your highest-paid 35 years of working. This monthly amount is called your average indexed monthly earnings, or AIME. Your AIME is broken up into three parts, which are essentially tiers, and they vary from year to year. At each tier, a different percentage is applied to that portion of your AIME. At the lowest tier, the percentage is 90%. At the second and third tiers, the percentages are 32% and 15%, respectively. This is what they look like for those first becoming eligible for Social Security in 2019:

  • 90% of the first $926 of your AIME
  • 32% of the portion of your AIME above $926, up to $5,583
  • 15% of your AIME above $5,583

Add up the results of those calculations and that's your benefit. For a taxpayer with an average income, the math works out to around 40% wage replacement. It'll be higher for lower-income individuals and lower for higher-income individuals.

Considering the expert advice to plan for 80% of your salary in retirement, Social Security's 40% wage replacement is, by design, half of what most retirees need.

Social Security's uncertain outlook

Social Security's uncertain future complicates things even more for current retirees. In 2020, Social Security expenses will exceed income, and the difference will be funded by dipping into trust fund reserves. The trust fund reserves will continue to fund an income gap until they run dry in 2035.

When the reserve funds run out, benefits will have to be paid from the Social Security income tax collected each year. And that tax income is expected to cover only 80% of scheduled benefits. In other words, Social Security benefits could be cut by 20% in just 14 years. That spells trouble for retirees who are wholly dependent on those Social Security checks.

Break the cycle

Your retired parents don't have a lot of options to reduce their dependence on Social Security. Their best course of action now is to downsize and lower their living expenses as much as possible.

But you, on the other hand, can break the cycle. The earlier you start planning for retirement income, the more options you'll have. The traditional way is to save 10% to 20% of your salary in 401(k) and IRA accounts. If those percentages seem out of reach, save at least enough to maximize your company match in the 401(k). Then plan on increasing your contributions every time you get a raise.

The IRS sets limits on how much you can contribute. In 2020, those limits are $19,500 for 401(k) contributions and $6,000 for traditional IRA contributions. If you're participating in your workplace 401(k), your IRA contribution won't be tax-deductible -- but the earnings will still grow tax-free. Depending on your income level, you might choose a $6,000 Roth IRA contribution instead. These are not tax-deductible, either, but your qualified retirement distributions will be tax-free.

Create passive income

Max out all those retirement plan contributions, and then start stashing away money in a taxable brokerage account. You might build up a fund that you can use later to buy investment property or create other sources of passive income.

Don't be your parents

The point is, don't rely on Social Security as your safety net. Maybe it's too late for your parents to build up a savings and income cushion, but it's not too late for you.