Please ensure Javascript is enabled for purposes of website accessibility

Neglecting This Aspect of Social Security Could Leave You Cash-Strapped in Retirement

By Maurie Backman – Aug 14, 2021 at 8:04AM

Key Points

  • Social Security helps many seniors pay their bills.
  • Relying solely on those benefits is a poor choice for one big reason.

Motley Fool Issues Rare “All In” Buy Alert

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

If you want to avoid money problems as a senior, you'll need to get your facts straight.

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.

Social Security cards.

Image source: Getty Images.

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.

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
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/27/2022.

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.