Retirement is often hailed as a magical period in life. But for a lot of people, it's hard.
Losing the steady paycheck from work you once relied on can deal a blow to your finances. So it's important to have a plan for generating the retirement income you need to pay the bills.
Your retirement income could come from a variety of sources. But in a recent MassMutual survey of Americans aged 55 to 65, 40% said they anticipate Social Security will be their greatest source of retirement income. And that's quite problematic.
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When you're reliant on benefits that may be smaller than you think
You don't necessarily need to replace 100% of your pre-retirement paycheck to live comfortably once your career wraps up. But most seniors find that to cover their bills without worry and have enough money left over for leisure spending, they need enough income to replace about 70% to 80% of their former paychecks.
The problem with Social Security is that it won't give you that much replacement income. If you earn an average wage, the monthly Social Security benefit you'll collect in retirement might replace about 40% of your former pay. That's unlikely to be enough to support the lifestyle you want.
This also makes one huge assumption -- that Social Security benefits won't be cut. Social Security is facing significant financial challenges that could force the program to slash benefits starting in about 10 years.
Those cuts aren't guaranteed to happen -- but they might. At that point, your benefits might give you even less replacement income.
You need a better plan
If you're counting on Social Security for most of your retirement income, you may want to rethink your plan and come up with a new one that has more of your senior income arriving from different sources. If you're nearing retirement and only have limited savings, aim to continue working a few extra years to boost your 401(k) or IRA balance. Doing so might also allow you to delay your Social Security claim, which could result in a higher monthly benefit than the one you're eligible to receive at full retirement age.
You can also look at continuing to work on a part-time basis, even once you decide to resign from your primary job. The gig economy makes it especially easy to find work that isn't too restrictive from a scheduling standpoint.
Plus, you could always get creative and use your home to generate income. If you have a larger space, find a year-round tenant. Or if you tend to spend larger chunks of time away from home (say, to visit your grown kids in another state), rent out your property when you're not occupying it if it's in a desirable location.
Planning to retire mostly on Social Security could mean setting yourself up for disaster. Instead of doing that, it pays to set yourself up with various income streams so that the monthly benefits you'll receive won't be your go-to source of income.
