Millions of seniors today collect a monthly benefit from Social Security. And for some of them, that monthly benefit represents their primary source of retirement income.
In fact, some people actually don't have any retirement income outside Social Security. And it's people in that boat who are most likely to struggle financially, especially during periods of rampant inflation (like the one we're technically still dealing with).
But new data from Northwestern Mutual reveals that members of Gen Z aren't planning to rely heavily on Social Security in retirement at all. And that's actually a good thing.
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Social Security is not at risk of going away
There's a lot of misinformation circulating about Social Security, including the fact that the program may be on the verge of being permanently eliminated due to funding issues. But actually, Social Security's main source of revenue is payroll taxes -- the taxes workers have to pay on their earnings. So as long as there's an active labor force, the program can continue to get the funding it needs.
Now what is happening is that Social Security is anticipating a large financial shortfall in the coming years as baby boomers exit the workforce in droves. This means benefit cuts are a distinct possibility in the not-so-distant future (namely in 2034, once the trust funds Social Security can dip into run out of money).
In fact, current and future recipients alike may need to brace for a reduction in Social Security income, to the tune of about 20%. But that's a very different scenario than there not being Social Security at all.
Still, Gen Zers are only expecting to Social Security to provide 15% of their total retirement income. And since it's pretty uncommon for employers to offer a pension these days, that implies that younger workers are intent on building their own savings.
The awareness to do so at an early age is very important, because contributing to an IRA or 401(k) plan steadily over a longer period of time is often the ticket to growing a lot of wealth. In fact, someone who contributes $250 a month to a retirement plan between the ages of 22 and 67 will end up with a nest egg worth over $1.15 million if their IRA or 401(k) delivers an average annual 8% return, which is a bit below the stock market's average. And someone who contributes $450 a month during that same time frame will end up with almost $2.1 million.
A good attitude to adopt
There's no reason for anyone to write off Social Security as a viable source of retirement income. But those benefits may be cut in the future. And even if they aren't, they'll only replace about 40% of the average wage earner's preretirement income.
Most retirees need a much larger amount of replacement income to live comfortably, so regardless of what happens with Social Security, saving independently is crucial. Thankfully, members of Gen Z seem to have already gotten that memo.
