Retirement would be a lot less stressful if we could count on Social Security to take care of everything for us. A lot of retirees rely upon the program as their primary or sole means of support, but it's usually not a good idea if you can avoid it.
Below, we'll take a closer look at why, along with how you can increase your personal savings to supplement the benefit you receive from Social Security.
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1. Social Security was never intended to cover all your costs
Though the program is many seniors' sole source of retirement income, Social Security was only intended to be a supplement to your personal savings. It was designed to replace about 40% of pre-retirement income for workers with average earnings. The government meant for you to cover the remainder of your costs with a pension, personal savings, or a combination of the two.
2. Social Security's buying power is decreasing
The program's benefits have lost approximately 40% of their buying power since 2000, according to a recent survey by the nonpartisan Senior Citizens League. This is due to rapidly rising prices and annual cost-of-living adjustments (COLAs) that many say don't accurately reflect the spending habits of retirees.
So while the average Social Security benefit is growing, seniors aren't able to buy as much as they could in the past with that money.
3. More seniors owe taxes on their benefits
The government taxes the Social Security benefits of seniors whose provisional income exceeds certain thresholds. Provisional income is defined as your adjusted gross income plus any nontaxable interest you have and half your annual Social Security benefit.
The government can tax up to 85% of seniors' benefits, and the thresholds for benefit taxation haven't changed in decades. Combined with rising average benefits, it means that more and more retirees find themselves giving a portion of their benefits back to the government each year.
4. Benefits could face cuts in the future
The latest Social Security Trustees Report indicates that the program's trust funds will be depleted in 2033 -- one year earlier than last year's report suggested. When this happens, the Social Security Administration will no longer be able to pay out all earned benefits to eligible seniors.
The federal government recognizes that this is an issue, and there's still time for it to correct the problem. But until Congress agrees upon a solution, we have to accept that benefit cuts are a possibility. In the worst-case scenario, the program might have to slash benefits by about 25%.
How to reduce your reliance on Social Security
All of the above factors make it pretty clear that you can't put all your trust in Social Security. If you want the best chance at a secure retirement, you need multiple sources of income you can depend on.
Obviously, it's great if you can stash 15% or more of your annual income into a retirement account each year. But even if you aren't able to save that much, it's still worth setting aside what you can. Investing your money will help it grow more quickly and help it go further in retirement. And if you qualify for a 401(k) match from your employer, make sure you claim this every year so you aren't leaving free money on the table.
Things are tougher if you can't afford to save for retirement. If possible, look for a higher-paying job elsewhere or start a second job. Reducing spending could also be another way to free up cash for retirement.
If that doesn't work, you might have to keep working longer than you originally planned. Or you could transition to a different job or to part-time work in retirement rather than quitting the workforce altogether.
At the end of the day, we all want to relax and focus on what we enjoy in retirement, rather than worrying about how we're going to pay the bills. While you'll always be able to count on some money from Social Security, it's going to be increasingly difficult to live off your checks alone. So looking to diversify your retirement income sources right now is one of the best things you can do for your future.
