Social Security is a program that millions of seniors rely on immensely. But if you're in the process of planning for retirement, it's important to have realistic expectations for the program -- and to realize that retiring on Social Security alone just isn't a good idea.
Your monthly benefits may not be enough
At the start of 2024, the average monthly Social Security benefit was $1,907 after recipients saw their payments rise thanks to a 3.2% cost-of-living adjustment. Now if you're someone who lives very modestly as a pre-retiree, then it may be possible to live on somewhere in the vicinity of $1,907 a month in retirement. But it's a situation that may also end up making you quite miserable.
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As a general rule, you should anticipate needing about 70% to 80% of your previous income once you retire. But for most seniors today who were average wage-earners during their careers, Social Security will only replace about 40% of their former income.
It's also important to recognize that while Social Security cuts are by no means guaranteed to happen, they are a possibility. The program, in the coming years, is expected to rely heavily on its trust funds to keep up with scheduled benefits. Once those trust funds run dry, Social Security may have to slash benefits by about 20% due to a funding shortfall.
Save for retirement so you're not left struggling
You may have every intension of living frugally once you stop working for good. But even so, you may find that living on $1,907 a month just isn't doable, especially when you factor in unavoidable expenses like having to pay for healthcare.
Now to be fair, $1,907 a month was the average Social Security benefit at the start of this year. In time, that number is likely to climb as future cost-of-living adjustments take effect.
But either way, if you're aiming to replace 70% to 80% of your pre-retirement income, Social Security alone won't get you there. What can get you there is consistent contributions to a 401(k) plan or IRA over time.
In fact, if you contribute $300 a month to one of these plans over a 40-year period, and your investments generate an average annual 8% return, which is a bit below the stock market's average, you'll end up with over $932,000 in savings. You can then withdraw from that sum to supplement your monthly benefits.
If you're nearing retirement and it's too late to save a bundle, try your best to arrange for another income source that isn't Social Security. You may be able to rent out a portion of your home for money, or join the gig economy once your career wraps up to bring in a little extra cash.
Retiring on Social Security alone is a move that generally won't work out well, regardless of what the average monthly benefit happens to be at the time. So you're really best off putting yourself in a situation where you have additional retirement income at your disposal.
