Many seniors enter retirement expecting to get the bulk of their income from Social Security. And to be fair, the program has been around a long time and has been helping seniors stay afloat for many years. But if your plan is to mostly live off Social Security once your time in the workforce comes to an end, you could end up in a world of financial pain.
Social Security's big limitation
A lot of people mistakenly think that Social Security will replace their entire paycheck. In reality, your benefits will replace about 40% of your pre-retirement wages if you're an average earner. And if you're an above-average earner, those benefits will offer even less replacement income.
So how much replacement income should you be aiming for? That will depend on the retirement plans you have and the lifestyle you hope to lead.
But as a general rule, it's a good idea to expect to need 70% to 80% of your pre-retirement income to live well as a senior. And so if you retire on Social Security alone, you could end up seriously cash-strapped once your career wraps up. Rather than doing that, consider these strategic moves.
1. Snag a larger benefit
One good thing about Social Security is that it will allow you to delay your filing for a higher benefit. You're entitled to your regular monthly benefit based on your wage history once you reach full retirement age, which is 66, 67, or somewhere in between, depending on when you were born.
However, for each year you delay your filing beyond that point, your benefits will grow by 8%, and that boost will remain in effect permanently. Once you turn 70, your monthly benefit can't grow any longer, but if your full retirement age is 67, you have an opportunity to score a 24% boost. And that will, in turn, make it so that Social Security replaces more of your former income.
2. Save well while you can
Because Social Security will only replace some of your former income, it's a good idea to save independently for retirement to give yourself access to more money later in life. If you contribute $500 a month to an IRA or 401(k) plan over a 30-year time period, and your invested savings generate an average annual 7% return (which is a bit below the stock market's average), you'll end up with about $567,000. That sum of money could allow for generous withdrawals that, combined with Social Security, make for a nice retirement income.
3. Do a little work
After working all your life, you may have little desire to hold down a job as a retiree. But if you manage to find a job you enjoy doing, it could be a great way to not only earn some money, but also fill your days in a meaningful way. Think about the things you do for fun. You may be able to turn some of your hobbies, like gardening or baking, into an income stream.
While seniors should be grateful that Social Security exists, it's also important to realize what level of replacement income those benefits will provide. The sooner you do, the sooner you can devise a plan to ensure that money isn't a problem for you later in life.