While many retirees today are forced to live solely on Social Security, that's not the case for everybody. There are plenty of older Americans whose income comes from a variety of sources, from savings to investments to earnings from part-time work.
There's a good chance that once you retire, you'll be counting on Social Security to help cover your expenses to some degree. But the one mistake you don't want to make is relying too heavily on those benefits once your career has come to an end.
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Don't overestimate your Social Security checks
Some people assume that once they retire, Social Security will pay them a monthly benefit that replaces the paycheck they once earned from work. But that's a huge misconception, and it's one that could cost you.
If you're an average earner, you can expect Social Security to replace about 40% of your preretirement paycheck, assuming broad benefit cuts end up being preventable. But living on 40% of what you used to earn is not an easy thing.
It's true that some of your expenses might drop in retirement, especially if you enter your senior years debt-free. But as a general rule, retirees are typically told they'll need 70% to 80% of their former income to maintain a comfortable lifestyle. If you retire on just Social Security, you won't get there -- not even close.
Know what to expect from Social Security
If you're many years away from retirement, it can be tricky to figure out what your income needs will look like. As you get closer, those numbers may be clearer.
But you don't want to wait until you're a year or two away from retirement to get a handle on what to expect out of Social Security. Instead, create an account on the Social Security Administration's website now and check out your most recent earnings statement. It should give you an estimate of your monthly benefit based on your personal wage history.
If you don't want to go through the motions of creating an account, you can use Social Security's quick calculator to see what future benefit you may be in line for based on your age and most recent income. You'll get the option to see that number in today's dollars or future dollars that account for inflation.
The reason you don't want to wait too long to look at these numbers is that if it turns out you're looking at much less income from Social Security than expected, you'll want time to adjust by boosting your savings. And the more years you have to fund your 401(k) or IRA, the more opportunity you'll have to take advantage of compounded returns in your account.
Although many retirees today depend a lot on Social Security, you don't want to be in a position where it's your main or, worse yet, only source of income. The sooner you recognize that your monthly benefits will only replace a small percentage of your paycheck, the sooner you can take steps to ramp up on retirement savings and take other steps to ensure that you're able to cover your retirement expenses without worry.
