I'm not retired yet. However, planning for retirement should begin well before retirement, so I'm already getting ready for the day it comes.
Like many Americans, I intend for Social Security to provide part of my retirement income. But can Social Security cost-of-living adjustments (COLAs) keep up with inflation? Probably not. Here's why I'm not relying on Social Security alone in retirement.
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Multiple reasons for not depending solely on Social Security
My main reason for not relying on Social Security in retirement is that my benefits won't be nearly enough to maintain my current standard of living. The program was designed to cover only 40% of retirement income. Unfortunately, Social Security provides at least half of the retirement income for around 24 million Americans ages 65 and older, according to the Social Security Administration (SSA). I don't want to be in that group.
I mentioned earlier that Social Security COLAs probably won't keep up with inflation. I fear that relying too much on Social Security would cause the buying power of my retirement income to slowly erode over the years.
The problem is that the inflation metric SSA uses to calculate annual COLAs -- the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) -- wasn't built with retirees in mind. This index doesn't give enough weight to healthcare prices and other costs, which make up a larger share of retirees' budgets than they do for younger Americans.
There's another factor I think about, too. Unless changes are made, the Social Security trust funds will run out of money by the end of 2032. To be sure, this depletion won't mean that Social Security benefits dry up altogether. However, it would mean a steep 24% cut in benefits. I'm hopeful that politicians in Washington, D.C. will take action before this happens. However, I don't want to base my retirement income on hope.
What I've done and am doing to supplement Social Security
Instead, I began socking away as much money as possible in 401(k) plans years ago. I made sure to take full advantage of employer matches. After starting to work on my own, I set up a solo 401(k) plan. Additionally, my wife and I have regularly contributed to Roth IRAs. As the prospects of retirement draw closer, I have begun investing more in dividend stocks than I did when I was younger.
Yes, I still expect that Social Security will be a key component of my retirement income. However, it will only be a part of the solution.
