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3 Drawbacks of Relying Only on Social Security for Retirement

By Sam Swenson, CFA, CPA - Mar 11, 2021 at 6:35AM

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It's not the best idea to rely on only one income stream in retirement.

The Social Security Administration (SSA), in a recent annual report, noted that the Trust Fund Reserves are slated to run out in the mid-2030s. While this won't spell the end of Social Security payments any time soon, it does make the average saver think a bit more about the sources of their retirement income.

In addition to Social Security, there are numerous other methods to fund retirement costs: Pension plans, personal savings, or perhaps even occasional work after you've left full-time employment. Here, we'll briefly go over five of the most apparent reasons to not rely solely on Social Security in retirement. 

1. Relying on the SSA is uncertain

We now know that the Social Security Administration is taking in less in tax revenue than it is paying out in benefits, which, as mentioned above, is expected to cause depletion of the OASDI Trust Fund Reserves by 2035.

To close the gap, we'll either require a tax increase or a benefit decrease to allow the SSA to continue paying in perpetuity. Given that we simply don't know how this will play out in the future, it's advisable to account for Social Security payments but ensure that they're not overweighted as a source of retirement income.  

2. Benefits may not be enough

The average SSA monthly payment is $1,543, according to the Administration itself. Assuming for simplicity that none of that is taxable, a full year of payments amounts to $18,516. Simply put, this is likely not going to be enough to maintain a retirement lifestyle that you'll be excited about.

If your spouse also receives the same amount, you can expect $37,032 on an annual basis -- better, but still less than the average annual household income in this country (around $60,000). "Enough" will of course vary from person to person and depend on a variety of factors -- but most people will need other sources of income rather than being able to fully depend on Social Security to cover retirement expenses. 

Cartoons of seniors exercising and traveling

Image source: Getty Images.

3. Pension plans are vanishing

The hope of a corporate or public pension is a reality for only some people, as most people now have to make do with defined contribution plans (401(k)s and 403(b)s) as opposed to defined benefit plans. Defined contribution plans require employees to bear the risk of covering retirement costs, as the employees are responsible for contributing and investing retirement money themselves.

Most corporations no longer offer predictable pensions in an effort to shed risk surrounding retirement cash flow. Without the expectation to receive stable pension payments, relying on Social Security is even more tenuous. 

Never rely on only one source

While Social Security is a welcome life raft for most people looking to retire as soon as possible, it's advisable to avoid relying too heavily on any one income stream. Here are a couple ideas for giving yourself some other sources of income in retirement beyond Social Security:

Retirement saving is an opportunity

There are myriad ways to save for retirement, but we can look at the Roth IRA as a simple example. If you were to put $6,000 into a Roth IRA every year starting at age 30 until age 67, and invested that amount in an S&P 500 Index Fund earning an 8% annual return, you'd end up with a miraculous $1.2 million at retirement, completely tax-free. Note that this assumes you started with zero at age 30 and never put a dime away into a 401k.

Clearly, saving in a Roth is a simple way to greatly increase your spending power in retirement -- even if you don't max out the account every year. 

Part-time work is accessible 

Depending on the nature of the job, freelance or part-time work in retirement can be both accessible and enjoyable. Many websites now exist to link freelance workers with employers, so you might consider engaging on a limited basis if it means relying less on your Social Security checks or stressing your investment portfolio.

Another stark reality: People usually enjoy earning money. It tends to give one a sense of purpose and a feeling of value, so adding a part-time income stream to help fund your retirement can now be seen as an opportunity as opposed to a burden. 

There are many low-lift opportunities that can make retirement less daunting -- ultimately, you want to end up with more than you need and not think about what Social Security doles out. Maintaining your ability to earn an income and getting a head start on retirement saving will most definitely reduce your reliance on the whims of the SSA.

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