What I Learned Trying to Factor Social Security Into My Retirement Plans

Social Security is an extremely important income source for many retired Americans today. Unfortunately, a lot of retirees rely too heavily on Social Security. And a result, many are struggling financially.

In this Reddit post, we have someone asking how to factor Social Security into their retirement income strategy. They’re aware that Social Security may face cuts in the near future, and they want to make sure they’re covered.

It’s an important question to be asking, and one that more people should bring up in the course of their retirement planning. Here’s what to know.

Your benefits will only replace a portion of your income

One big misconception about Social Security is that the benefits you get in retirement will replace all or most of your former paycheck. In reality, if you earn an average salary, you can expect Social Security to replace about 40% of it in retirement, assuming benefits are not reduced broadly.

That, however, is not something you can assume. Social Security is facing a severe financial shortfall in the coming years as many baby boomers retire. Not only will that strip the program of key payroll tax revenue, but it will also result in an influx of claimants, putting a big strain on the program’s resources.

Social Security can use its trust funds to keep up with scheduled benefits until they run out. The latest projections from the program’s Trustees have that happening in 2034 (assuming both trust funds are combined), though that timeline could change.

The point, though, is that in a best-case scenario, you can expect Social Security to replace about 40% of your pre-retirement wages. If benefits are cut on a broad level, they may only end up replacing closer to 30%.

You can count on Social Security, but only to a point

There’s nothing wrong with factoring Social Security into your retirement income picture. Even if benefits are cut in the future, they’re not going away completely.

However, it’s best to accumulate a large enough nest egg so that Social Security only plays a minor role in your retirement finances. That way, if benefit cuts become more substantial, you won’t be left in the lurch.

It’s a common rule of thumb for retirees to need 70% to 80% of their former income to live comfortably once they stop working. To play it ultra-safe, you may want to assume that Social Security will only replace 30% of your previous income in case benefit cuts happen. That means that the bulk of your retirement income would need to come from savings of yours, or from another source.

If you’re getting closer to retirement, run some numbers to estimate your annual income needs. Then, create an account on SSA.gov to see what monthly benefit you’re looking at from Social Security, and reduce that number by about 20% to account for potential cuts.

From there, see what gap you’re looking at. That tells you how much income needs to come from your savings or another source. That source could be a pension, a part-time job, or both.

It’s also a good idea to sit down with a qualified financial advisor to discuss the role Social Security should play in your retirement finances. An advisor can not only tell you what to expect, but help you create a savings and investing strategy that’s designed to set you up with enough income to enjoy your retirement to the fullest.