Social Security is a significant source of income for millions of retirees. In fact, nearly one-quarter of workers expect their benefits to be their primary income source in retirement, according to a 2022 report from the Transamerica Center for Retirement Studies.
But Social Security was designed to replace only around 40% of your pre-retirement income. And in recent years, benefits have lost buying power and become less dependable. If you're planning to rely on Social Security in retirement, you might need to rethink that strategy.
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How far will Social Security go in retirement?
The average retiree collects around $1,669 per month from the program, according to the most recent data from the Social Security Administration (SSA). That amounts to just over $20,000 per year.
Keep in mind, too, that your benefits could be subject to both state and federal taxes. There are currently 12 states that tax Social Security, and depending on your income, you could also owe federal taxes on up to 85% of your benefit amount.
Inflation has also taken a toll on Social Security, and as a result, your benefits won't go as far as they used to. The checks have lost roughly 40% of their buying power in the last two decades, according to a 2022 report from the advocacy group The Senior Citizens League. As inflation continues to soar, this problem could worsen over time.
As if that isn't tough enough, benefit cuts could also be looming. The SSA is facing a cash shortage, and according to the most recent projections, benefits could be reduced up to 23% by 2034 if Congress can't agree on a solution before then.
All of these factors will make it difficult (if not impossible) for most people to survive on Social Security alone in retirement. Even if you have other sources of income, your benefits might not go as far as you expect.
What can you do to prepare?
Despite the challenges plaguing the program, it's still possible to retire comfortably. But you'll need the right strategy.
One of the best ways to prepare is to simply save more in your retirement fund. That's often easier said than done, especially during tough economic times. But saving even a little can go a long way.
For example, say you invest an extra $100 per month while earning an average rate of return of around 7% per year. After 10 years, you'll have accumulated around $16,500, which is close to a year's worth of Social Security benefits for the average retiree.
Another option is to wait a few years to begin claiming benefits. For instance, say you have a full retirement age of 67, and by filing at that age, you'd receive $1,600 per month. If you begin claiming at 62, your benefits would be reduced by 30%, leaving you with $1,120 per month.
But if you wait until 70 to file, you'd receive your full benefit plus an extra 24%. That's $1,984 per month -- a whopping $864 more than you'd receive by filing at 62. If your savings are falling short, delaying benefits could be a smart move to boost your income.
Social Security benefits can be a lifeline for many retirees, but it's wise to have a backup plan. Prepare now, and you can protect your retirement regardless of what happens with Social Security.
