Don’t let it wreck your retirement.
Social Security serves as a critical income source for millions of seniors today. And for some retirees, the monthly benefit they get from Social Security is the only source of income they have at their disposal.
That’s really not an ideal situation to land in, though. And once you hear this important piece of Social Security information, you’ll understand why.
Know how much income your benefits will replace
Many people assume that they’ll be able to get by in retirement on Social Security alone. But workers in that boat often fail to recognize what little income Social Security will provide them with.
So here’s the scoop. If you’re an average earner, you can expect Social Security to replace about 40% of your pre-retirement earnings. This assumes that benefits aren’t cut in the future. And that’s a distinct possibility. However, we’ll go with what we know now and say that if you earn $50,000 a year, you can generally expect to get about $20,000 from Social Security once you start collecting benefits.
Now if those benefits are a supplement to other income sources, like personal savings, then that could make for a pretty comfortable retirement. It’s when people retire on Social Security alone that they tend to run into issues.
And if you’re not sure, ask yourself this: Do you really see yourself being able to cover your bills without stress on 40% of your current paycheck? If the answer is no, then your next move is simple — start prioritizing your retirement savings, or continue to do so if you’re in the habit of funding an IRA or 401(k) plan already.
It’s true that you might manage to shed some expenses once your career comes to an end. You won’t have to pay to commute to a job you no longer have, and you might be mortgage-free by the time retirement rolls around.
But otherwise, many of the bills you’re on the hook for today are likely to stick with you in retirement. And 40% of your paycheck likely won’t cut it. The sooner you understand that, the sooner you can take steps to build up some savings — and avoid the financial struggles so many seniors today face.
What amount of replacement income should you aim for?
There’s no hard and fast rule when it comes to the amount of replacement income you’ll need as a retiree. Aiming for 70% to 80% is a good starting point, but you might need more replacement income than that if you intend to live in an expensive part of the country and uphold habits that require a lot of money, like travel.
A good bet is to try to map out a retirement budget well ahead of your senior years so you have a game plan. But either way, know that retiring on Social Security alone probably is not going to work out well for you. Even if you’re willing to live frugally, a 60% pay cut can be a really huge hit to absorb.
