You'll often hear that it's important to save for retirement and not simply plan to live on Social Security alone. But the reality is that saving for retirement takes effort and sacrifice. And it's easy enough for your IRA or 401(k) contributions to fall by the wayside when life's many expenses get in the way.
If you're a good number of years into your career and haven't really been focusing on retirement savings, you may want to start doing things differently. Retiring on Social Security alone could result in a world of financial pain, and you don't want to struggle to cover your bills later in life.
Image source: Getty Images.
Can you afford a 60% pay cut?
If you're an average wage earner, you can expect your Social Security benefits to replace about 40% of the paycheck you're used to collecting. This assumes, however, that Social Security cuts don't come down the pike. As of now, that's a distinct possibility, given the program's financial shortcomings.
But let's be positive and assume that benefit cuts don't happen. Even so, you're still looking at losing 60% of your earnings. You might think you'll be able to manage on that sort of pay cut, but once you actually run the numbers, you might feel differently.
Let's assume that right now, you earn $60,000 a year, or $5,000 a month. Let's also assume you spend your entire paycheck on essential expenses and leisure.
Imagine only being able to spend 40% of what you spend today. What expenses would you cut? Would you stop dining out entirely? Would you cancel cable, leaving yourself with less entertainment at home?
And would those cuts even be enough? Or would you have to cut back on things like electricity and hot water usage and potentially give up a car due to not being able to afford the payments?
It's easy to tell yourself that your expenses will shrink in retirement. In reality, the only expenses you're likely to shed as a retiree are commuting costs and, perhaps, a mortgage, as many people manage to pay off their homes in time for retirement. But even when you subtract the cost of those two things, you might easily end up with a major shortfall on your hands if you retire on Social Security alone, giving you just 40% of your current paycheck to spend.
Ramp up your savings while you can
It may be possible to retire on Social Security without any other income to fall back on. But will that make for a happy retirement? Probably not.
Rather than ignore your savings, try your best to boost your 401(k) or IRA contribution rate, even if it's by a mere $20 or $30 a month for now. You don't necessarily need to push yourself to retire with a $1 million nest egg. But if you retire without any money in savings and are forced to exist solely on Social Security, you might end up very miserable after a lifetime of hard work.
