3 Reasons Social Security Can't Be Your Only Retirement Income Stream

Some Americans today get all of their retirement income from Social Security. And if that’s your plan, it certainly takes the pressure off when it comes to savings. If you don’t have to save for retirement, you can use your paycheck to cover near-term bills and other purchases.

But aiming to retire on Social Security alone isn’t a wise move. Here’s why.

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1. Your benefits won’t replace your entire paycheck

Your expenses might shrink once you enter retirement. But that doesn’t mean they’ll go down substantially.

Social Security, meanwhile, might replace just 40% of your pre-retirement earnings if you make an average salary. Retiring on those benefits alone could force you into a 60% pay cut, which may leave you scrambling to cover your expenses.

Retirees commonly need 70% to 80% of their former paychecks to comfortably manage their bills. If you don’t have supplemental income, you might struggle on just Social Security, even if you’re on board with living frugally.

2. Your benefits may be cut due to a funding shortfall

Social Security might replace 40% of your income if benefits aren’t reduced. But that’s not a given.

Social Security is facing a major funding crunch. In the coming years, a shrinking labor force will strip the program of key revenue.

Social Security cuts aren’t guaranteed, but they’re a possibility. It will take significant reforms to prevent cuts, and while Congress has always saved Social Security before, things may be different this time around. It’s unwise to rely solely on a retirement income stream that’s at risk of being reduced due to factors outside your control.

3. Your benefits may not keep up with inflation

Over time, living costs are apt to rise due to inflation. You need your retirement income to keep pace with inflation so you don’t lose buying power. But Social Security alone may not do it for you.

Social Security benefits are eligible for a cost-of-living adjustment (COLA) every year. But due to a flaw in how those raises are calculated, benefits have lost significant buying power through the years. The Senior Citizens League, an advocacy group, says Social Security has lost 13.7% of its purchasing power since 2016 due to insufficient COLAs.

An investment portfolio, on the other hand, can be set up to beat inflation or at least better keep pace with it.

There’s nothing wrong with making Social Security a big part of your retirement income plan. But retiring on just Social Security is a decision you might sorely regret.

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3 Reasons Social Security Can’t Be Your Only Retirement Income Stream was originally published by The Motley Fool