If you're a member of the workforce today, you may not be intimately familiar with Social Security if you're not in a place where you're gearing up to claim benefits. Still, you may be aware of a few key things.
You probably know that Social Security is an important income source for millions of retired Americans today. And you've probably at least heard rumors about Social Security's potential demise.
Image source: Getty Images.
To set the record straight on Social Security, let's start by clearing up what's happening with the program's finances. Social Security is in a situation where, in the coming years, it expects to owe more in benefits than it collects in revenue. The program can use its trust funds to bridge that gap -- but only for so long.
The latest update on Social Security's combined trust funds is that they're expected to be depleted in 2034. At that point, the program could face extensive cuts.
To be clear, though, Social Security is not at risk of completely disappearing. And while benefit cuts are certainly possible, lawmakers have never allowed them to happen in the past. As such, the situation may be salvageable this time around, too.
However, there's another important thing about Social Security every working person needs to know today. And not having this essential information could cause problems once your retirement rolls around.
Know what to really expect from Social Security
Social Security may not end up having to cut benefits, which is really great news. But that doesn't mean those benefits will replace your preretirement paycheck in full.
It's a big misconception that once you retire, Social Security will pay you a monthly benefit equal to an amount you're used to earning. In reality, Social Security might only replace about 40% of your preretirement earnings -- and that's assuming you collect a pretty typical paycheck. If you're a higher earner, Social Security might replace an even smaller percentage of your wages.
Now, you may be thinking, "But don't many people retire on Social Security alone?" And the answer is yes, they do. A lot of people also smoke cigarettes, but that doesn't make it a healthy habit.
The reality is that you can expect your expenses to decline in retirement to some degree. You might have a paid-off home by then, and your transportation costs might shrink if you're not commuting to work.
But for the most part, you should not expect to be able to live comfortably on 40% of your preretirement wages. Getting by on 60% to 70% of your former paycheck may be doable if you're able to shed some costs. It depends on what you want retirement to look like.
Retiring on just Social Security, however, is not a great idea. And the sooner you recognize that, the more you can avoid that scenario.
A little bit of savings can go a long way
By now, you're hopefully convinced that it's important to save for retirement on your own, rather than just rely on Social Security to cover your future expenses. But if saving money were such an easy thing, more people would probably do it.
So, let's not beat around the bush: Finding the money for long-term savings isn't always easy. However, you may not need to save as much as you'd think to amass a significant nest egg. If you give your money a lot of time to grow and invest it wisely, you may be able to get away with saving a fairly small amount each month.
Say you start saving for retirement at 30 and end your career at 67. If you contribute $100 a month to an IRA or 401(k) plan that generates a yearly 8% return, which is a bit under the stock market's average, then you could be looking at a nest egg worth about $244,000 at the start of retirement. Make it $150 a month, and your balance rises to $365,000, all other things being equal.
Of course, if your goal is to really not end up dependent on Social Security at all, you'll need more savings than that. The point, though, is that retiring on Social Security alone is unlikely to work out well for you -- even if benefit cuts do not come to be.
So having supplemental income is crucial. The sooner you recognize that, the sooner you can begin saving and investing to pave the way to a more comfortable retirement.
