If You're Counting on Social Security to Fully Fund Your Retirement, You're Making a Big Mistake

I’ve been writing about Social Security for well over a decade. And I’ve found that there’s a lot of misinformation about the program and how it works.

Some people, for example, think all Americans are entitled to Social Security once they reach a certain age and that everyone receives the same monthly benefit. In reality, Social Security benefits are earned by paying taxes on wages. And the amount of Social Security you get in retirement depends on your earnings history and your filing age.

Another big Social Security myth I hear all too often is that it’s more than feasible to retire on those monthly benefits alone. I’m here to tell you that if you go that route, you might sorely regret it.

You won’t get enough replacement income

The main reason retiring on Social Security alone just doesn’t work boils down to income needs. If you earn an average paycheck during your career, Social Security might replace 40% of it in retirement. But most seniors need 70% to 80% of their former paychecks for a comfortable standard of living.

Now, sure, you could opt to live very frugally in retirement if Social Security is the only income stream you have. But is that what you actually want?

Do you want to pinch pennies every week when you grocery shop because you don’t have savings on top of Social Security to tap? Do you want to be forced to downsize and leave your neighborhood because your Social Security checks don’t cut it?

You don’t necessarily need $3 million in retirement savings on top of Social Security to have breathing room in your budget once you stop working. But it’s important to have some savings, or another income stream, to supplement your Social Security checks.

The program could face potential cuts

You know how I just mentioned that Social Security might replace 40% of your wages? Well, that assumes benefits aren’t cut. But that’s not a given.

Social Security is facing some big challenges due to a shrinking labor force. That’s going to strip the program of key revenue in the coming years, creating a shortfall. And once the program’s trust fund that pays retirement benefits runs dry, Social Security recipients could see their monthly checks shrink by 22%.

Of course, that’s not a given. Social Security has faced financial difficulties before, and lawmakers have never just sat back and allowed benefits to be cut.

The point, however, is that relying on Social Security alone for retirement income is risky. If your boss were to call a meeting and say your company is struggling financially, would you do nothing? Or would you dust off your resume and start looking for a different job?

You don’t have to write off Social Security for your retirement. But lining up additional income is crucial.

The program’s cost-of-living adjustments tend to fall short

Inflation makes life cost more over time. The good news is that Social Security benefits are eligible for a cost-of-living adjustment (COLA) each year to help keep up with inflation. The bad news is that the program’s COLAs don’t tend to keep pace with real-world cost increases.

The Senior Citizens League, an advocacy group, reports that Social Security benefits have lost an estimated 13.7% of their buying power over the past 10 years. A change to the COLA formula could help, but Congress doesn’t seem to be in a rush to make one. If you want your retirement income to have a way of keeping up with inflation, it can’t consist of only Social Security.

If you’ve paid into Social Security your entire life, it’s natural to want those benefits to be a big part of your retirement plan. But that’s not the problem. The problem is making them your only income stream. The sooner you realize that, the sooner you can begin building savings and taking other steps to set yourself up for the retirement you deserve.