Millions of seniors today look to Social Security as a major source of retirement income. Chances are, down the road, you'll do the same. So it's important to not only claim benefits strategically but also read up on the program so you know what to expect from it.
Now, you'll often hear that one of the biggest Social Security mistakes you can make is filing for benefits as early as possible. You can sign up for Social Security once you reach the age of 62. But if you don't wait until your full retirement age to claim Social Security, your monthly benefit will be reduced for life. And a major reduction could mean struggling financially throughout retirement.
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But believe it or not, that's not the most financially damaging Social Security mistake you might make. There's an even more potentially catastrophic blunder you might end up falling victim to if you aren't careful.
It's all about realistic expectations
You may decide to wait until full retirement age to claim Social Security, so you're not looking at a reduced monthly benefit for life. Heck, you may even decide to delay your filing past that point to grow your benefit, which you have the potential to do until the age of 70.
But the biggest mistake you might make in the context of Social Security is thinking that your monthly benefit will be enough money to live on. If you adopt that mindset and decide not to save for retirement at all in light of it, you might end up severely cash-strapped for years on end. And that could lead to a pretty miserable existence.
So what's a realistic expectation from Social Security? If you earn an average wage, anticipate that claiming your monthly benefit at full retirement age will provide you with enough income to replace about 40% of your current earnings. That, however, assumes that benefit cuts don't come down the pike. That's a distinct possibility in about 10 years as Social Security's trust funds run out.
Now, let's assume you're able to cut back on spending somewhat in retirement. You may be able to live fairly comfortably on 70% or 75% of your current earnings. You might even manage to get by on 60%.
But does living on just 40% of your current income really seem doable or desirable? If not, then you'll need to push yourself to start building savings for retirement.
Otherwise, you might have to slash your spending in a very big way. And that could mean not only giving up all of the modest luxuries you enjoy but, more so than that, giving up certain basic comforts, like having access to a car. With a 60% pay cut, a vehicle is something you may not be able to afford.
Get moving on retirement savings
The more time you give yourself to pump money into a retirement plan, the larger a nest egg you stand to accumulate. So, if you've yet to begin saving for your future, stop assuming you can fall back on Social Security alone and instead assess your spending and find ways to carve out money for IRA or 401(k) contributions.
It's one thing to claim Social Security early and end up with a reduced monthly benefit because of that. But it's another thing to wind up unable to pay for even basic expenses because you don't have anywhere close to enough money.
