Social Security is undoubtedly a great benefits program that has kept millions of seniors out of poverty. But it may not be all that you'd hoped by the time you get to retirement. And unfortunately, if you have unrealistic expectations about Social Security, this can cost you your financial security.
You don't want to retire and only then realize your Social Security check isn't as big as you imagined. So, come to terms with these harsh realities ASAP -- while you still have time to take action.
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1. Benefits aren't enough to live on
If you are hoping Social Security is going to be enough to live on as a senior, you need to realize right now that's probably not going to happen.
Most experts recommend you have enough money in retirement to replace about 80% of pre-retirement income. You may need more than that if you have health issues or want to travel. And while you may be able to get by on less, you would likely have to make some sacrifices to do it.
Sadly, Social Security benefits alone are not going to come close to that 80% figure. These benefits are designed to replace 40% of your pre-retirement income -- about half of what you'll actually need. This is because Social Security was designed to work with a pension and savings to cover your costs. It's up to you to make sure you put these other supports in place (especially if your employer doesn't offer a guaranteed pension, which most don't).
2. The buying power of benefits is declining
One reason Social Security benefits seem like an attractive source of retirement income is that they're supposed to help shield you against the impact of inflation. The benefits program actually has cost-of-living adjustments (COLAs) built right into it so you see your check go up when prices rise.
The problem is there are issues with the COLA formula -- including questions about whether the right cost-of-living index is used to estimate how much benefits need to go up each year. As a result, Social Security benefits have lost about 40% of their buying power since 2000.
With the value of your benefits eroding over the course of your retirement, you're likely going to find it harder to cover costs using your Social Security check later in life. This is a problem since your retirement savings balance may not be as hefty as you'd like by that time since you've been withdrawing from it for years.
You need to plan for Social Security benefits to provide you with less spending power over time and to make sure you don't drain your savings before the time comes when you really need them.
3. You may have to claim Social Security earlier than anticipated
Finally, many people assume they'll claim Social Security later in life. And, ideally, that's a smart approach, because a delayed benefits claim can result in a larger monthly payment. The problem is this dream of a delayed claim may not be possible if you're forced into early retirement and don't have enough supplementary savings.
Rather than basing your retirement plans around the assumption you'll start Social Security at 67 or 70 (and get the bigger benefit that goes along with a later claim), it's safer to plan for your checks to start at 62. That way, if you do find yourself able to put off filing for benefits, the larger checks you end up with will be a bonus. But if you're forced into an early claim, it won't be a financial disaster.
By coming to terms with these three harsh realities now, you can make plans for your future that don't rely on unrealistic assumptions about Social Security -- and you can actually end up with the financial security you deserve.
