Quick Read
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Social Security replaces only about 40% of pre-retirement income for average earners, and most retirees need a lot more income to be comfortable.
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Social Security faces potential benefit cuts if lawmakers don’t intervene soon.
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Healthcare costs typically rise faster than Social Security’s cost-of-living adjustments.
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If you’re thinking about retiring or know someone who is, there are three quick questions causing many Americans to realize they can retire earlier than expected. take 5 minutes to learn more here
There are many older Americans today who get the majority of their retirement income from Social Security. And there are plenty of people whose only source of retirement income is Social Security.
You do not want to end up in that predicament. Here’s why you can’t live on Social Security alone — and what you can do to avoid that fate.
1. Social Security will only replace about 40% of your paycheck
Once you retire, you can expect to need less income than you did while you were working. Part of this stems from the fact that there’s no need to save for retirement while you’re in retirement. But also, some of your largest costs, like housing and transportation, may shrink.
Still, you should expect to need about 70% to 80% of your former income to live comfortably once retirement begins. Social Security, however, will only replace about 40% of your former wages if you earn an average salary.
Now if you’re willing to work longer, you could boost your monthly Social Security checks by delaying your claim past full retirement age. But still, you should not expect Social Security to replace your paycheck in its entirety, nor should you assume it’ll replace 70% to 80% of what you used to earn.
2. Social Security is facing cuts
If you’ve been hearing rumors about Social Security going bankrupt, you should know that they’re bogus. Social Security is not in danger of disappearing completely since it’s funded primarily by payroll taxes.
That said, Social Security is facing the possibility of benefit cuts in the near term. And if lawmakers don’t intervene, you may end up in a situation where Social Security replaces much less than 40% of your pre-retirement paycheck.
While lawmakers do have solutions to prevent Social Security cuts, each one seems to have its own set of drawbacks. So it’s not a given that benefit cuts will be avoidable, even though lawmakers know they need to try.
3. Rising healthcare costs will likely outpace your Social Security COLAs
Social Security benefits are eligible for a COLA, or cost-of-living adjustment, every year. The purpose of COLAs is to help recipients maintain their buying power as inflation drives costs upward.
But there’s one expense that tends to outpace broad inflation — healthcare. The combination of Medicare premiums, deductibles, and copays could render future Social Security COLAs pretty useless. Without other income at your disposal, you might quickly fall behind.
How to avoid financial struggles in retirement
At this point, you’re hopefully convinced that retiring on Social Security alone is not a good idea. So let’s talk about solutions to avoid that.
One is to save well for retirement. Contributing just a few hundred dollars a month to an IRA or 401(k) could lead to a nice nest egg over time, especially if you invest that money wisely.
Another option is to consider an annuity. An annuity is a financial tool that could end up paying you money on a regular basis for the rest of your life. Setting yourself up with an annuity on top of Social Security is a great way to not have to worry about outliving your savings.
There are different types of annuities you can look at, so your best bet is to speak to a trusted financial advisor who can walk you through your options.
Either way, make sure that you have more than just your monthly Social Security paycheck to spend in retirement. Even if you delay your claim for larger monthly benefits, Social Security is unlikely to be able to cover all of your bills, especially as healthcare costs rise. Setting yourself up with supplemental income could help you avoid a world of financial stress.
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