When you think ahead to retirement, are you expecting Social Security to provide most of the money you'll need? If so, you could be in for a nasty surprise.
It's vital to be realistic about exactly what Social Security will do for you and how far these benefits will go. Here's the ugly truth about what role Social Security can fulfill for retirees, and what your options are if you find your benefits won't be enough for you to live on after all.
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This is how much of your income Social Security will replace
It may come as a shock to you, but the harsh reality is that Social Security benefits are going to replace only a small percentage of your income -- somewhere around 40% for the typical worker. Plus, these benefits are progressive, so higher earners will see an even smaller percentage of their pre-retirement earnings replaced.
To understand just how little money Social Security will provide relative to your earnings, it's helpful to see what your benefits might look like depending how much you made over your career. According to the Center on Budget and Policy Priorities (link opens PDF), here's how annual benefits compare to pre-retirement annual earnings for a worker who retired at age 65 in 2021:
- If the worker made $26,579 in past average earnings, benefits would equal $12,825.
- If the worker made $59,065, benefits would equal $21,162.
- If the worker made $94,503, benefits would equal $28,009.
- If the worker made $142,800, benefits would equal $34,180.
As you can see, a lower earner would have more than 40% of pre-retirement income replaced while a higher earner would have less.
But no matter how much you earned, your benefits alone would fall far short of providing the recommended 70% to 80% of the amount you were making before you quit working. If you replace less than that amount of income, you could face a major decline in your quality and standard of living.
How to shore up your retirement
As you can see, Social Security benefits cannot be the sole source of income for you in retirement unless you want a life of financial hardship during your later years. They were not meant to be the primary income source because they were created to make up one leg of a three-legged stool designed to support you as a retiree. A pension and savings were supposed to be the other two legs.
Since you can't expect to get all your income from retirement checks, you should work on saving as much money as you can throughout your career so you have a 401(k) or other retirement plan you can take distributions from. If you're already retired and have found that living on Social Security alone is difficult, you may also want to think about returning to work or looking into very low cost-of-living areas where you may be able to make ends meet.
You don't want to find yourself struggling as a retiree, so it's best to make a plan as early as possible to ensure you aren't over-reliant on Social Security and are being realistic about what these benefits can really do to help ensure your financial well-being.
