As you make your retirement plans, you'll likely be expecting Social Security to play a big role in supporting you. After all, these retirement benefits become available once you turn 62 -- and, by then, you will have been paying into the Social Security system for many years to earn them. They're also guaranteed to last for life.
But, while you can count on Social Security to help support you, you need to realize it may not play as big a role as you might have hoped. In fact, it's crucial to understand these three harsh retirement truths as you make your plans for your later years.
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1. Social Security isn't enough to live on
The single most important thing to consider when making retirement plans is where your other income will come from to supplement Social Security. The harsh reality is that your retirement benefits are not going to go nearly as far as you might have hoped.
The average Social Security benefit in 2023 is $1,688.69 per month -- which, as you can see, isn't a whole lot of money. The reason the average is low is because benefits are only intended to replace 40% of pre-retirement earnings, since they're meant to support you in conjunction with a pension and savings. It's crucial to realize the limited role Social Security is going to play in supporting you and make provisions to save enough to cover the rest of your needs as a retiree.
2. You can't control whether benefit cuts or changes will happen
Relying too much on Social Security can be dangerous, not just because benefits won't provide the full income you need, but also because the rules for how these benefits work are out of your control.
The harsh reality is that lawmakers could make changes to shore up the future of the retirement benefits program, and those changes could be unfavorable ones for retirees. The Social Security trust fund is expected to run dry by 2034, which would mean that benefits could only be paid out of income coming in from current workers. This would lead to around a 23% cut to Social Security benefits.
Lawmakers aren't likely to just let seniors face a huge cut in their income -- but if they can't find a compromise, that could happen automatically. Efforts to shore up the benefits program could also result in changes like a shift in the formula used to calculate cost-of-living adjustments (COLA) so seniors get less generous raises, or a change in full retirement age so you must wait longer to get your full benefits.
Since you don't have control over whether these modifications will occur, be aware during your retirement planning that you may not end up with all the benefits you're expecting.
3. Your benefits shrink substantially with an early claim
The last major consideration when making your retirement plans is the effect of an early Social Security claim on the amount of benefits. Checks become available starting at age 62, but full retirement age (FRA) is between 66 and six months and 67 for anyone born in 1957 or later. If you don't wait until at least FRA, your standard benefit shrinks. And if you wait until FRA but don't delay until 70, you pass up the chance to increase Social Security payments by earning delayed retirement credits.
The financial effect of an early claim is significant. If your FRA is 67 and you claim benefits at 62, it results in a 30% reduction in your standard benefit. You'd have a lot less Social Security to rely on if you made that choice. On the other hand, a big increase could be earned by waiting until 70 to start payments. Your checks would be 24% larger if you claimed at 70 instead of at full retirement age if your FRA was 67.
You'll need to take this into consideration when deciding what age to claim your benefits. If you want to hold off starting Social Security to maximize monthly income but don't want to delay retirement until you are in your 70s, then you would need to ensure you have plenty of income to support you without benefits until you're ready to start them.
By coming to terms with these harsh Social Security realities early, you can make the choices that are right for you when it comes to preparing for your later years.
