Planning for retirement is far better than resigning from your job on a permanent basis and winging it from that point on. As part of your planning, you'll probably be running some numbers to see how much annual income you expect to need. You'll likely also try to figure out how much money you'll get out of the various income sources that will be available to you.
If you're bringing savings into retirement with you, for example, you'll want to come up with an annual withdrawal rate that makes sense for you. And you'll probably also want to figure out what to expect from Social Security.
Many people, however, make the mistake of assuming that Social Security will replace more of their income than it actually will. And that's a trap you don't want to fall into.
Know how much replacement income to anticipate
If you're an average earner, you can expect Social Security to replace about 40% of your pre-retirement wages. This, however, assumes a few things.
First, it assumes that benefits aren't cut universally, which may happen if lawmakers don't manage to find a way to address Social Security's impending financial shortfall. Next, it assumes that you don't slash your benefits to a large degree by claiming them early.
Think about your anticipated retirement expenses, from housing to transportation to healthcare to food. Will 40% of your previous paycheck cover them and still leave you with enough financial wiggle room to actually enjoy your senior years? If not, you'll want to have enough savings to pick up the slack -- and potentially ramp up your savings between now and your anticipated retirement date.
You may also want to consider pushing back retirement a year or two to give your savings a lift. Doing so could also help you snag more Social Security income.
You can get more out of Social Security
While Social Security won't come close to replacing your pre-retirement paycheck in full, there is a pretty easy step you can take to boost your monthly benefits. All you need to do is delay your Social Security filing past full retirement age, which is when you're entitled to your complete monthly benefit, based on your personal wage history.
The option to grow your Social Security benefits via a delayed filing runs out when you turn 70. But if you were born in 1960 or later, full retirement age for Social Security purposes is 67. If you wait three years to sign up for Social Security rather than claim benefits at your full retirement age, you can boost that monthly income stream by 24% -- for life.
All told, many people get into trouble by assuming that Social Security will replace the bulk of their pre-retirement wages, but that's absolutely not the case. So make sure you understand how much replacement income Social Security will give you, and then make adjustments to your plans, as necessary, to ensure you won't wind up cash-strapped once your career comes to an end.