You'll often hear that it's not a good idea to plan to retire on Social Security alone. And that advice is spot on.
Social Security will only replace about 40% of your pre-retirement income if you're an average wage earner, and seniors tend to need a higher level of replacement income to live comfortably. Plus, that 40% threshold may not apply in a little more than a decade if Social Security cuts come down the pike.
A lot of workers are worried that Social Security won't be there for them at all in retirement. In a recent Allianz Life study, 74% of respondents said they can't count on Social Security when planning for retirement income.
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But should you be writing off Social Security? Or is that going to too much of an extreme?
Social Security isn't going away
It's true that Social Security is in danger of having to cut benefits. The problem is that the program gets the majority of its revenue from payroll taxes. But as the labor force shrinks in the coming years due to the anticipated mass retirement of baby boomers, Social Security's primary source of revenue will follow suit.
Social Security has trust funds it can tap to keep up with scheduled benefits, even once it starts taking in less payroll-tax revenue. But once those trust funds run out of money, which is now expected to happen as early as 2034, benefit cuts could be on the table.
As such, it's easy to see why the majority of Americans don't think they can count on Social Security for retirement income. But while it's important to account for future benefit cuts, it's also important to recognize that Social Security isn't about to disappear.
Even if benefits are cut, current recipients of Social Security should still be in line to continue collecting about 80% of their former paychecks. And future retirees can anticipate being paid around 80% of what they're entitled to, as well. So while benefit cuts aren't great news, they also shouldn't spell the demise of Social Security, either.
Have other income sources at the ready
You don't need to write off Social Security completely in the course of your retirement planning. But should you line up other sources of income?
Absolutely. In fact, in the aforementioned study, 88% of respondents said it's critical to have another source of income in retirement outside of Social Security.
That could mean building a nest egg and setting yourself up with investments that will pay you dividends in retirement, like real estate investment trusts (REITs). It could also mean planning to work in some capacity when you're older, whether by joining the gig economy or starting a business.
Social Security is certainly not in the best financial shape. But it's important to recognize that the program will still be there for you in some capacity once you're ready to start collecting the benefits you've earned. And there's nothing wrong with counting on the program for some income during your senior years.
