If you are planning on retiring, you need to have money saved to help support you. If you were hoping to rely on Social Security benefits alone, this could come as a shock.
The reality is, while Social Security is an important income source in your later years, it absolutely should not be the only income coming into your household. If you rely on these retirement benefits more than you should, this could be a financial disaster for you. Here are four big reasons why you could really end up regretting your decision if you anticipate living on Social Security alone.
1. You’ll get an annual income equal to around 40% of pre-retirement income
Social Security benefits are designed to work in conjunction with savings and pension benefits to provide you with support. As a result, the benefits formula is designed to ensure retirement checks replace 40% of pre-retirement income.
Unfortunately, you aren’t going to be able to comfortably take a 60% pay cut. Most experts recommend being able to replace about 80% of what you earned on the job, while some seniors actually end up needing the same amount of money or more after they quit work. You don’t want to find yourself struggling to live on just 40% of what you were used to, so you’ll want to make absolutely certain you have additional savings to provide extra funds.
2. A good portion of your benefits will be eaten up by healthcare costs
According to the Bureau of Labor Statistics, the mean annual spending on healthcare came in at $6,668 for seniors 65 and older in 2020. Since spending on healthcare increases over time, this will likely be higher for future seniors.
With the average Social Security benefit totaling $1,661 in 2022, a senior who had mean healthcare spending would see more than one third of their check disappear to medical care costs. That doesn’t leave much money for anything else unless you have supplementary income from other sources.
3. You will lose buying power over time
Finally, if you’re relying on Social Security alone, you’ll be disproportionately affected by the fact that Social Security benefits are losing buying power over time.
Retirees receive periodic Cost of Living Adjustments to their benefits in order to help their income keep pace with inflation (the rising cost of goods and services). Unfortunately, the Senior Citizens League has found that the formula used to calculate these benefits is imperfect, and Social Security checks have lost 40% of their buying power since 2000.
If your spending power goes down 40% over the course of your retirement — as it very well could if you’re relying on Social Security alone — this is going to leave you in a really difficult financial situation as you are nearing the end of your life and unable to return to work.
For all these reasons, it’s crucial you have some money besides Social Security to help you fund your retirement. By saving in an investment account to prepare for your future, you can avoid these undesirable outcomes and ensure you have the money you need as a retiree.