Please ensure Javascript is enabled for purposes of website accessibility

50% of Pre-Retirees Think Social Security Will Be a Major Source of Senior Income, and That's a Problem

By Maurie Backman – Jun 1, 2020 at 6:03AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Social Security is facing serious cuts that today's workers need to know about.

Millions of seniors today count on Social Security to pay their bills. In fact, 64% of retirees consider it a major source of income, according to a new survey by the Society of Actuaries. But 50% of pre-retirees may be in for a huge financial shock for one big reason: They expect the same out of Social Security at a time when future benefit cuts are very much on the table.

Social Security's future is rocky

In April, the Social Security Trustees revealed that if lawmakers don't come up with a solution to pump more money into the program, benefit cuts may be on the table as early as 2035, the year Social Security is expected to exhaust its trust funds. Those trust funds can be tapped to bridge the gap when Social Security owes more in benefits than it collects in revenue, and that's the exact situation it expects to be in as more and more baby boomers exit the workforce in the coming years. But once those trust funds run dry, scheduled benefits won't be payable.

Middle-aged man reading book

IMAGE SOURCE: GETTY IMAGES.

The COVID-19 crisis is, unfortunately, only making things worse. Social Security's main source of revenue is payroll taxes, but with millions of Americans out of work and jobless claims hitting a record high, the program is not taking in money as it normally would. As such, we may find that its trust funds run dry well before 2035, thereby pushing up the date when benefits may be slashed across the board.

Prepare to rely less on Social Security

If you're a member of the workforce who plans to bank heavily on Social Security in retirement, it may be time to reset your expectations. Even if benefits aren't reduced, which is something many lawmakers are fighting for, one thing you should know is that Social Security will only replace about 40% of your pre-retirement income if you're an average earner. Most seniors, however, need more like 80% of their former wages to live comfortably. Of course, downsizing your lifestyle will lower the percentage of replacement income you'll need in retirement, but the point is that you shouldn't plan to live on Social Security alone, even if benefits aren't slashed. Rather, you should make an effort to save independently for your golden years, whether by participating in your employer's 401(k) plan or funding an IRA.

How much money should you be socking away? Most financial experts agree that saving 15% to 20% of your earnings is ideal. If that's not feasible, do the best you can. Setting aside just $250 a month in a 401(k) or IRA for 25 years will leave you with roughly $190,000 in savings if your investments in your account generate an average annual 7% return (which is a few percentage points below the stock market's average). Granted, that's not a huge sum of money in the grand scheme of what could be a 25- or 30-year retirement, but it's certainly better than kicking off your senior years with no savings at all.

There's nothing wrong with assuming you'll get some money from Social Security during retirement. Just don't depend too heavily on those benefits, because if you do, you might get burned.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
332%
 
S&P 500 Returns
104%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.