Millions of seniors today collect a monthly benefit from Social Security. But in the context of Social Security, you have the unfortunate opportunity to make a number of mistakes.
You could, for example, sign up for benefits at the wrong time and slash them in the process. Or you could end up working while collecting Social Security and forgetting about the program's earnings-test limits.
But perhaps the biggest mistake you might make in the context of Social Security is assuming your benefits will replace your former paycheck in full. That line of thinking could leave you with a massive financial shortfall on your hands.
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Know what to expect from Social Security
You might assume that Social Security is meant to take the place of your pre-retirement income in full. But it's not.
Right now, if you're an average earner, you can expect Social Security to replace about 40% of your pre-retirement wages. If you're a higher earner, you might get even less replacement income out of your monthly benefits.
All this, of course, assumes that benefit cuts don't happen. But the reality is that Social Security cuts are a possibility that could come to be in about 10 years from now if lawmakers don't manage to find a way to pump more money into the program. If that unwanted scenario becomes reality, Social Security will provide you (and everyone else who's entitled to benefits) with even less replacement income.
That's why it's so important to get a good handle on what Social Security will pay you well ahead of your senior years. If you enter retirement with the assumption that all of your bills will be covered on Social Security alone, you may be in for a financial shock. But if you save for retirement knowing full well that you can't live solely on those monthly benefits, you can potentially avoid a world of financial stress.
Get an estimate of your monthly payments ahead of time
One really great thing about Social Security is that you don't have to guess at the monthly benefit you may be in line for. The Social Security Administration will tell you what that number looks like based on your wage history if you create an account on its website and access your most recent earnings statement.
Of course, the further along you are in your career, the more accurate that estimate is likely to be. That's because the monthly Social Security benefit you collect as a retiree will be based on your 35 highest income-earning years. If you're 35, your earnings statement may not contain as accurate an estimate as it would for someone who's 55.
But still, it's a good idea to access that information and see what your monthly benefit looks like as of now. If the number is shockingly low, you'll at least have a heads-up that you'd better start saving. And that's a far better scenario than assuming that Social Security will replace your pre-retirement income in full, only to learn just how wrong you were.
