Millions of older Americans today get a monthly benefit from Social Security. And for many people, those benefits are a true financial lifeline.
But it's important to know what to expect from Social Security ahead of retirement. And one big misconception could leave you scrambling to catch up on savings.
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Your benefits won't replace your pre-retirement paycheck in full
One major myth about Social Security is that your monthly benefits will completely take the place of your former paycheck. But that's not true at all.
In a best-case scenario, you can expect Social Security to replace about 40% of your pre-retirement wages. And that assumes two things:
- That you earn a relatively average wage
- That Social Security benefits aren't broadly reduced in the future
So as an example, if you earn $60,000 a year right now, it would be reasonable to assume that you'll get about $24,000 a year in Social Security, assuming benefit cuts don't come to be. That's not a negligible amount of money per se. But it also may not be nearly enough to live on if you're used to bringing home $60,000 a year.
That's why it's so important to understand how much replacement income you'll get from Social Security -- and do your best to save accordingly so you're not left with a giant shortfall. If you don't save enough, you might have to scramble to cover your basic living costs once your career comes to an end.
Building a nest egg may be easier than expected
The idea of having to save substantially to fund your retirement may seem daunting. But one thing to realize is that if you give yourself time, you might manage to amass a lot of savings without parting with too much income month after month.
If you sock away $300 a month in a retirement plan starting at age 37, and you retire at 67, which would be your full retirement age (FRA) for Social Security if you're in your thirties now, you'd end up with about $408,000. That assumes an 8% average annual return in your portfolio, which is a bit below the stock market's average. Make it $400 a month, and you're looking at more like $544,000.
Of course, you can also take steps to try to boost your monthly Social Security benefit so you're able to get more income from the program in retirement. For each year you delay your claim beyond FRA, your monthly benefit gets an 8% boost, up until age 70. So with an FRA of 67, you have the potential to raise your monthly benefit by 24% by sitting tight.
It's important to realize that Social Security will not replace your pre-retirement paycheck in full. If you recognize that early on in your career, you'll have a chance to build up a nice amount of savings over time without having to scramble to play catch-up.
Remember, you won't necessarily need to replace 100% of your paycheck once you retire. The general convention is to aim for 70% to 80% of it.
Of course, it's best to think about what you want retirement to look like when landing on an income goal. But either way, know that whatever that goal amounts to, Social Security alone is unlikely to get you there.
