If it weren't for Social Security, many people wouldn't be able to retire. But thankfully, Social Security is still going strong and currently serves as a key income source for millions of retired seniors.
If you're approaching retirement or are in the process of planning for it, you may have every intention of relying heavily on Social Security once your career wraps up. But there's one important piece of Social Security information you need to have before you start to finalize your retirement plans.
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Don't overestimate the buying power your benefits will give you
Many people mistakenly think they'll be able to cover their living costs on Social Security alone. But in reality, those benefits tend to provide a lot less income and buying power than people expect.
Right now, you may be used to living on close to 100% of your income. (Ideally, you're not living on 100% because you're saving some of what you earn for the future.) But if you're an average earner, you can expect Social Security to replace about 40% of your pre-retirement wages.
Now think about what a 60% pay cut might look like for you. If you currently spend 95% of what you bring home on expenses and save 5% of your earnings, that's a pretty big hit. And it's an even larger hit if you're used to spending every last bit of your paycheck.
Of course, the one benefit of being in retirement is that you no longer have to save for retirement. But even so, living on just 40% of your earnings is apt to be a huge adjustment. So you'll want to make a point to not plan to live on Social Security alone.
If you're currently saving for retirement in some capacity, great. If not, make changes to your spending so you're able to build up some sort of nest egg. You're going to need it.
And if you're close to retirement age and haven't managed to save a notable amount for it, consider working a few years longer so you can build a small nest egg. Working longer might also allow you to boost your Social Security benefits via a delayed filing so that they replace a bit more than 40% of the paycheck you're used to collecting.
Know what to expect
Some people wind up cutting expenses in retirement to cope with a lower income. That's a route you may be willing to take. But can you really slash more than 50% of your spending? That's questionable.
As such, it's important to be realistic about the income Social Security will provide you with before you're retired and either ramp up your savings efforts or make adjustments to your plans, as needed. You don't want to end up in a situation where Social Security is your only income source or your nest egg only provides a few thousand dollars a year on top of what Social Security gives you.
The expenses you end up facing in retirement may be much higher than expected. So the last thing you want at that stage of life is a truly drastic pay cut.
