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Study: 40% of Older Adults May Be Setting Themselves Up for a Difficult Retirement

By Katie Brockman - Jan 20, 2020 at 11:35AM

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Research shows a lot of Americans will likely struggle in retirement.

As you're preparing for retirement, you may be picturing a life of leisure. You finally have the opportunity to stop setting the alarm clock and spend your time however you please. Maybe you have a bucket list of fun activities planned too, from traveling to enjoying new hobbies to spending time with the grandkids.

There's one major hurdle that can get in your way of enjoying a comfortable retirement, however: expecting too much from Social Security.

Senior woman sitting on a couch looking worried


Millions of older adults face cash problems in retirement

In theory, the most prepared retirees will have three sources of income (often referred to as the "three-legged stool"): income from a pension, income from a retirement fund, and Social Security benefits.

However, many recent and future retirees don't have all three legs on their stools. Pensions are not nearly as common as they once were, leaving a lot of retirees to depend just on their savings and Social Security checks.

But new research from the National Institute on Retirement Security found that around 40% of retirees don't have any savings to live on, nor do they have access to a pension, meaning Social Security is their only source of income.

It's not easy to balance on a one-legged stool, and those who are trying to survive on Social Security benefits alone in retirement have their work cut out for them. Your monthly checks are only intended to replace around 40% of your pre-retirement income, which can make it difficult to pay the bills if your benefits are the only money coming in.

Also, there's a chance that your benefits could be reduced in the relatively near future.

Right now, the Social Security Administration is running a deficit as it pays out more in benefits than it's receiving from taxes. The organization is currently tapping its trust funds to bridge the gap, but those funds are expected to run out of money by 2035.

At that point, the amount coming in from payroll taxes will only be enough to cover about 75% of estimated future benefits. In other words, unless the government finds a fix in the coming years, retirees could see their benefits reduced.

Ideally, it's best to go into retirement with a solid stash of savings along with Social Security benefits. But if you're nearing retirement age with next to nothing saved, you may have no choice but to rely on your monthly checks for most (or all) of your retirement income. If that's the case, there are a few things you can do to make the most of the situation.

How to maximize your Social Security benefits

In order to boost your benefit amount, it's important to first understand how your benefits are calculated.

To determine your basic benefit amount -- which is how much you'll receive if you claim at your full retirement age (FRA) -- the Social Security Administration looks at your average income over the 35 highest-earning years of your career. That number is then adjusted for inflation, and the result is your basic benefit amount.

If you want to increase your benefit amount, there are a couple of ways to do so. First, you can work more than 35 years. You're likely earning more per year now than you were earlier in your career, so by working more than 35 years, you can increase your average earnings by replacing some of your earlier, lower-earning years with more recent, higher-earning years. And when your average overall income is higher, so is your basic benefit amount.

Another way to increase your benefits is to boost your income while you're still working. When you increase your yearly income, that increases your average overall earnings -- which in turn boosts your basic benefit amount. And if you can increase your income and work more than 35 years, that can give your benefits a double boost.

Finally, a third way to increase your monthly checks is to wait past your FRA to claim benefits, because the longer you wait (up to age 70), the bigger your monthly checks will be.

In fact, if your FRA is age 67 and you claim benefits at age 70, you'll receive a 24% bonus each month on top of your basic benefit amount. If you claim earlier than your FRA, however, your benefits will be reduced by up to 30% -- which may not do you any favors if you have to rely on your benefits as your sole source of income.

Now, in theory, your overall lifetime benefits should be roughly the same regardless of what age you begin claiming. If you claim early, you'll receive smaller checks but more of them. On the other hand, delaying benefits will earn you bigger checks, but fewer of them over a lifetime.

However, life doesn't always work out so perfectly, and sometimes you're better off claiming at one age over another. If you have no other source of income and expect to spend quite a few years in retirement, delaying benefits to earn those bigger checks might be your best bet.

For many older Americans, Social Security benefits are the only thing keeping them afloat financially in retirement. While that's a tough situation, it doesn't mean you can't make the most of it. By finding ways to maximize your benefits, you can give yourself the best chance of enjoying a comfortable retirement.

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