The idea of guaranteed income for life is something many people dream about. And once you're old to collect Social Security, it could become your reality.
Social Security is designed to pay you a monthly benefit for life. And even better, benefits are eligible for annual cost-of-living adjustments (COLAs) to help them keep up with inflation.
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But as natural as it is to rely on Social Security for retirement income, there's one big mistake all retirees risk making. And it's a big one you need to avoid at all costs.
Don't assume Social Security will cover your retirement costs in full
One big misconception about Social Security is that those monthly benefits will take the place of your preretirement paycheck in full. But if you earn an average salary, you can expect Social Security to replace about 40% of it once you stop working.
Now it may be possible to get by on a lower income once you're retired, since you may be able to shed certain expenses by then. But living on just 40% of your former paycheck may prove difficult.
Think about the things you spend money on now. Many of them aren't going to go away in retirement.
You may be mortgage-free by retirement. And if you're not working, you won't have commuting costs. But you'll still face other housing costs, like property taxes, insurance, and maintenance. And while you may not need to drive to work every week, you might still need a car to get around, which means paying for gas, maintenance, and insurance.
Plus, some of your costs might rise in retirement. If you're not busy working, you might spend more on entertainment. If you're home more during the day, your heating and cooling bills may be higher. And whether you end up with medical issues or not, you could end up paying more for healthcare as a Medicare enrollee than you did when you had employer insurance.
As such, it's not a good idea to retire on just Social Security. If you do, you may find yourself struggling to keep up with your costs.
Set yourself up with additional income
While Social Security might play a pivotal role in your retirement income, you should have additional sources of money to look forward to. Those could include:
- Savings you build in an IRA or 401(k) plan
- Investments in a taxable brokerage account
- Rental income from a second home (or from a room or area in your primary home you rent out)
- Earnings from a part-time job or business you opt to start
The more income streams you have on top of Social Security, the more financially stable your senior years might be.
So make sure not to overestimate those benefits in your head in the course of your retirement planning. Instead, come up with a strategy to supplement those monthly checks so you're able to enjoy the comfortable lifestyle you deserve.
