Tens of millions of seniors collect Social Security, and those benefits are instrumental in helping them pay the bills. But Social Security is by no means a perfect solution to your retirement savings needs, and you may not wind up with as much income from the program as you'd expect. Here are three truths about Social Security that might inspire you to rethink your approach to retirement savings.
1. Those benefits won't pay for your retirement by themselves
Many people neglect their nest eggs during their careers because they figure they'll fall back on Social Security once retired. In reality, those benefits are only designed to replace about 40% of the average earner's preretirement income. Most seniors, however, need somewhere in the ballpark of 80% of their former earnings to enjoy a comfortable lifestyle, so if your plan is to count on those benefits alone in retirement, you could easily wind up cash-strapped and unhappy.
IMAGE SOURCE: GETTY IMAGES.
If you're still not convinced: The average recipient today collects just $1,461 a month, or $17,532 a year, in Social Security benefits. Even if you cut back on a host of living expenses, that still may not suffice to cover the goods and services you consider essential to your quality of life. So don't ignore your savings when you have a chance to build some; setting aside even a small amount of money each month during your working years could make a huge difference for your retirement.
2. An across-the-board reduction in benefits could happen
Social Security relies heavily on payroll taxes to cover its financial obligations. In the coming years, however, the program will be in a position where it's paying out more money than it takes in, thanks in part to the throngs of baby boomers exiting the workforce. Now, Social Security does have trust funds it can tap to bridge the gap between scheduled benefits and incoming revenue, but according to the latest Trustees Report, those funds are expected to run out of money in 2035. Once that happens, recipients could see as much as a 20% reduction in their monthly benefits.
As mentioned earlier, Social Security will now replace about 40% of your former income if you were an average earner. If an across-the-board cut in benefits comes to pass, it'll replace an even smaller percentage, which is why you need savings to compensate.
3. You may have no choice but to claim benefits early
Though your Social Security benefits are based on your 35 highest-paid years on the job, the age you claim them could change your monthly payout. If you file at full retirement age (either 66, 67, or somewhere in between, depending on the year you were born), you'll get the full monthly benefit your earnings history entitles you to. But if you file earlier -- which you're allowed to do beginning at age 62 -- you'll slash your benefits for each month you claim them ahead of full retirement age.