Twenty-one percent have bought into a myth about Social Security that will lead to financial disaster.
Most people dream of a retirement in which they can travel and enjoy spending their free time indulging in hobbies. Of course, doing that requires having enough money to support themselves once their paychecks stop coming.
Sadly, far too many Americans are at risk of making a major Social Security mistake that could ruin their chances at a comfortable retirement. This mistake could put them in jeopardy of not even having enough money to cover the basics. Here’s the issue that is putting around 1 in 5 future retirees in danger of having serious financial difficulties in their senior years.
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This Social Security mistake could lead to big problems
According to a recent Allianz Life survey, a shocking 21% of Americans believe that Social Security alone will be enough to fund their retirement, and that they don’t need any other income sources. This is a huge problem, and one that could lead to financial disaster. Social Security was never intended to be a sole source of support for seniors, and the benefits that it provides are too small to allow you to live comfortably.
The program was intended to work with other sources of income. Specifically, it was meant to be part of a “three-legged stool” that provided stability and support to retirees. The three legs were supposed to include:
Pensions were more common when Social Security was created. Now, it’s rare to receive a pension offering guaranteed income unless you work in the public sector or belong to certain unions. Most people in the private sector don’t have this source of funds, so they’re more reliant on the money in their 401(k) or other plan they’re contributing to.
That’s why it’s so damaging when people assume Social Security alone will be enough to cover their costs. The 21% of Americans who believe that myth may contribute too little to their 401(k)s, IRAs, or other retirement or investment accounts. They could find themselves facing a very serious financial shortfall in retirement, when they discover the reality of what Social Security benefits can actually do.
What can Social Security really do for you?
When people think Social Security alone is enough for a secure retirement, they wind up making other mistakes. For one thing, many end up retiring before reaching full retirement age (FRA) for Social Security. FRA is 67 if you were born in 1960 or later. If you leave work before then and have to claim benefits because you don’t have savings to live on, you’ll shrink your benefit. You face a 30% reduction if you claim benefits at 62 when your FRA is 67. This reduction will leave you with less to live on for the rest of your life.
More important, though, is the fact that Social Security is only designed to replace around 40% of pre-retirement income. People typically need to replace 80% to 90% of their pre-retirement earnings to maintain a comfortable standard of living in retirement. If only 40% of your money is replaced by Social Security, the rest must come from your investments. You need to plan for that and save money throughout your working life in order for that to happen.
If you assume Social Security will provide you with all the income you need and you don’t set aside enough money to invest, you may end up having to make substantial changes to your life when you reach your senior years. In fact, you’ll have great difficulty living on Social Security alone even if you cut your budget to the bone.
Don’t put yourself in a position where you spend your senior years struggling. Be sure to understand the reality of what Social Security can do for you, and make plans to save and invest throughout your life to amass a nest egg that gives you the rest of the income you need. When you retire and don’t have to live near the poverty line, you’ll be glad you realized the truth and made an effort to save.