If you're looking forward to the day you'll collect Social Security, you aren't alone. The retirement benefits program is popular among Americans, and many future retirees are eager for when the government will start providing them with a guaranteed source of income.
Unfortunately, when you finally receive your benefits, there's a good chance you'll be disappointed. Here are three reasons why that's the case.
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1. Benefits only replace 40% of income
The biggest reason you'll probably be disappointed in your Social Security benefits is that the check you get will almost certainly be smaller than you're expecting.
If you're assuming you can live on Social Security alone, or even come close to doing so, you're probably wrong. Your retirement benefit checks are meant to replace only around 40% of preretirement income. That's not nearly enough for most people to come close to maintaining their standard of living.
To do that, you'd need to replace about 80% to 90% of what you were earning. Social Security is not designed to replace that much, as it's supposed to complement other income sources, including a pension and savings. The sooner you realize this, the better, as you can start planning for ways to supplement your benefits with your 401(k) and other retirement accounts.
2. You have to wait a long time to avoid shrinking your benefit
Social Security will also disappoint you for another reason. Chances are good that you'll want to retire in your early 60s, or at least by 65 when you become eligible for Medicare. And 65 used to be the full retirement age (FRA) for Social Security. That meant you could retire then with your standard benefit.
Unfortunately, that's not the case anymore. Depending on when you were born, Social Security is now between 66 and eight months and 67. If you were born in 1960 or later, your FRA is 67. If you were born in 1959, it's 66 and 10 months, and if you were born in 1958, it's 66 and eight months.
But if you claim your benefits before your full retirement age, you shrink your checks. This means you're left deciding between delaying the start of your payments, which could potentially necessitate putting off retirement, or accepting a lifetime of reduced monthly benefits.
Worse yet, studies have shown the optimum age to claim Social Security is age 70, as you're most likely to get the most lifetime benefits if you wait. That happens because you earn delayed retirement credits that increase your payment for each month you wait between FRA and 70.
If you want to maximize Social Security, you'll need to work for a long time, or perhaps live on savings for close to a decade of your retirement, depending on when you quit work for good. That's probably not news most future retirees want to hear.
3. Benefits aren't keeping pace with inflation
Finally, you could find yourself disappointed with Social Security because your benefits will end up being worth less during your retirement.
Although cost-of-living adjustments (COLAs) are built into the program to try to prevent that from happening, the formula used isn't a very accurate measurement of the inflation that retirees experience. Instead, raises are calculated using a formula based on the spending habits of urban wage earners and clerical workers.
Since the COLAs that Social Security provides underestimate the inflation that actually hits retirees, benefits have lost 36% of their buying power since 2000. That's according to the Senior Citizens League. Finding out your checks will buy you less and less each year can be upsetting, especially if you were assuming COLAs would stop that from happening.
Face these Social Security realities now so you can make sure that you have plenty of money from other sources. Don't over-rely on retirement checks to provide the secure retirement you deserve.
