My college friends and I are largely at an age where our parents are either retiring or thinking about retiring. And so the topic of Social Security tends to come up when I see my friends' parents because they know that I write about it all the time.
Recently, I was talking to the father of a friend of mine about Social Security, and he said point blank that he knows he'll need income outside those benefits to cover his various expenses. And I was very relieved to hear him say that. But he also said he expected Social Security to replace a little more than half of his paycheck.
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I gently had to inform that his estimate was off. But thankfully, it wasn't egregiously off.
A lot of people are of the impression that Social Security will replace all or most of their preretirement income. And unfortunately, those people are in for a pretty rude awakening.
Understand what you'll get from Social Security
Most seniors need about 70% to 80% of their preretirement income to live comfortably. There are, of course, exceptions to this range. A frugal person with simple needs might get by on 60% of their former salary, while someone hoping to travel a lot might need 90% of their preretirement paycheck or more.
So where does Social Security fit into that? As of now, average earners can expect Social Security to replace 40% of their preretirement wages, while above-average earners should expect less replacement income.
But that assumes that Social Security benefits aren't cut in the future. As of now, the program's trust funds are expected to run dry in 2034. Once that happens, benefits could be slashed to the tune of 20%, thereby allowing for even less replacement income.
Now, going back to the conversation I had with my friend's father, his estimate wasn't all that inaccurate. He was expecting Social Security to cover about 60% of his preretirement earnings, and after getting a reality check from me, he's committed to boosting his savings for the next couple of years, after which he hopes to close out his career.
The point, however, is that it's important to understand just how much of your income Social Security will actually replace. That way, you can plan accordingly, whether by socking away more money in a 401(k) or IRA, working longer, or making adjustments to your actual retirement plans. You may, for example, have to come to terms with downsizing your living space or lifestyle if you expect to retire with only a modest nest egg and live largely on Social Security.
Get your numbers straight
A lot of people make assumptions about Social Security and struggle for it in retirement. So don't fall into that trap.
Know what role Social Security is likely to play as far as replacement income goes, and keep tabs on happenings with the program in case benefit cuts become reality. Should that happen, you may need to adjust your plans yet again to compensate. But you're better off knowing ahead of retirement than closing out your career and struggling financially once your paycheck from work is gone.
