If you are planning on Social Security playing an important role in supporting you in retirement, you need to know the truth about what these benefit checks can do for you.
While Social Security can help support you, there's a very good chance you will end up getting less money from this program than you might expect. Here are three reasons why that's the case.
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1. Social Security only replaces 40% of pre-retirement income
One of the biggest reasons you may be surprised by your benefit check is because you may be expecting it to replace a larger portion of your income than it's designed to.
It's a common misconception that Social Security is supposed to offer enough money for retirees to live on. That is definitely not the case. It's only designed to replace around 40% of pre-retirement earnings. Since you need about 80% to 90% to avoid a major decline in quality of life, the rest of the money is supposed to come from other sources.
When Social Security was first created, many people had guaranteed pensions from employers. These pensions would combine with Social Security and savings to provide a comfortable retirement. Most people don't have pensions offering reliable lifetime income in today's day and age. So, instead, plenty of savings is needed to supplement Social Security.
It's important to make sure your retirement goals are set with the plan for your 401(k) and other investment accounts to replace about 40% of your pre-retirement earnings while maintaining a safe withdrawal rate (usually around 4% or less).
2. Benefit cuts could be coming
There's another reason why you may be unpleasantly surprised about your Social Security benefit. Cuts could be on the horizon.
Social Security's trust fund is expected to run dry around 2033, which would mean benefits could be paid only out of current revenue collected. There'd only be enough money to pay about 77% of promised benefits if that happens.
Congress could, and probably will, take some kind of action to stop this. But that will probably involve reforms to Social Security that reduce the benefits you receive. The last reforms, back in 1983, raised full retirement age so retirees either had to wait longer to retire with their standard benefit or face early filing penalties that reduced the amount they got each month.
You can't predict exactly what cuts will happen, but it's reasonable to assume that you may not get the full amount of money you've been promised.
3. You may have to claim your benefits sooner than planned
Finally, the last big reason you could find yourself with a smaller-than-anticipated Social Security check is because you may have to claim your payments earlier than you'd hoped.
If you're planning to wait to retire until full retirement age, or even longer, to claim your Social Security checks, you could face an unpleasant surprise if health, family, or employment issues force you to stop working sooner than anticipated.
If you can't afford to retire without Social Security, claiming benefits could be the only option -- and that could mean getting hit with early filing penalties or giving up the chance to increase your payment by earning delayed retirement credits. Missing out on credits that raise your check after full retirement age, or reducing your standard benefit by claiming ahead of FRA, could both leave you with a lower Social Security payment than you'd hoped for.
For all of these reasons, it's a good idea to set your savings goals based on getting the minimum Social Security benefits available to you (the amount you'd be entitled to if you claimed at age 62). If you end up with more benefits than anticipated, then you'll just have extra money, which is a much better position to be in than having too little.
