Millions of seniors today get a monthly benefit from Social Security. And you may be counting on the program to help fund your retirement, too.
But it's important to know what to expect from Social Security before your retirement begins so you can save and plan accordingly. Here are some must-know points to commit to memory.
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1. Your benefits won't replace your former paycheck in full
One big Social Security misconception that tends to hurt retirees is that those monthly benefits can basically take the place of pre-retirement wages. That's not at all true.
If you're an average earner, you can expect Social Security to replace about 40% of your former paycheck. So that means that if you're nearing retirement with an $80,000 annual salary, you can expect to get around $32,000 a year from Social Security.
Clearly, that's a pretty large pay cut. So it's important that you know about it ahead of time. That way, you can ideally push yourself to save so you have access to other retirement income.
2. Benefits may be cut if lawmakers can't shore up Social Security's finances
Social Security gets the majority of its funding from payroll tax revenue. But as many people age out of the workforce and fewer replacement workers come in, that revenue stream is apt to shrink.
Social Security has trust funds it can tap to keep up with scheduled benefits until that money runs dry. But that's supposed to happen in roughly a decade, at which point benefit cuts may be on the table.
That's another reason why it's so important to build up a nest egg of your own. As it, Social Security will only replace a small portion of your pre-retirement earnings. If benefit cuts are thrown into the mix, that percentage will only shrink.
3. Cost-of-living adjustments won't necessarily help you keep up with inflation
Social Security benefits are eligible for an annual cost-of-living adjustment, or COLA, the purpose of which is to help seniors maintain their buying power as inflation drives the cost of living upward. But those COLAs often fall short in achieving that purpose.
In a 2022 report, the nonpartisan Senior Citizens League warned that Social Security recipients have lost 40% of their buying power since 2000. And a big reason boils down to flaws in the way COLAs are calculated.
As such, it's not a great idea to bank on those annual Social Security raises for your retirement. Instead, you'll want outside income you can tap when the cost of living inevitably goes up, as it naturally tends to do over time.
Make sure to save appropriately
You may have noticed a common theme across these various Social Security points -- that there's a strong need to save money for retirement and not just rely on benefits alone. The reality is that even if Social Security doesn't face cuts, and even if lawmakers change the way COLAs are determined so that they do a better job of tackling inflation, retiring on Social Security alone could mean facing a serious income shortfall.
So your best bet is to understand the ins and outs of Social Security, but also, its limitations. And once you've done that, make a plan to boost your savings so you're able to enjoy retirement to the fullest without having to pinch pennies every step of the way.
