Are you unrealistic about the role of Social Security in your retirement?
As a senior, you probably rely on Social Security as an important source of your financial support. But you can’t afford to rely too much on it or have an overly optimistic view of the retirement income your benefits will provide.
Unfortunately, many Americans are doing just that because they don’t realize this simple truth about the role Social Security is designed to play in funding their later years.
Here is the reality of social security
Social Security is meant to help you in your later years, but the key word is to help. The program was originally designed to be part of a “three legged” stool to provide support to the elderly. The three legs were:
- Social Security
- Pensions paid by employers
- The savings retirees have acquired over the years
For most people, however, the stool has only two legs left: savings and social security. And social security benefits have not been increased to compensate for the disappearance of the pension provided by the employer. This means that retirees must rely more on their savings to supplement their retirement benefits.
Seniors will generally need to invest a substantial amount of money in order to generate sufficient income to maintain their standard of living in their later years. This is because it is generally estimated that older Americans need to replace at least 70-80% of their pre-retirement income, if not more.
Social Security cannot come close to offering this amount of money. These benefits were designed to replace around 40% of pre-retirement income, which would leave seniors facing a 60% reduction in their income after retirement. This decline comes at a time when certain expenses, such as health care, tend to increase sharply.
How to prepare to supplement Social Security
Once you have a realistic assessment of what Social Security will do for you as a retiree, you can set a retirement savings goal that allows you to build the nest egg you’ll need to cover the rest of your expenses. subsistence as an elderly person. You can estimate your personal profit by logging into your mySocialSecurity account or by using the calculators available on the Social Security website. You may notice that the higher your income, the less your income will be replaced by Social Security, so the more you will need to save to have enough.
You can also estimate how much income you are likely to need as a retiree by calculating your estimated final salary and assuming that you will need 80% of that amount. To do this, take your current salary and assume a 2% increase each year until retirement.
The difference between the income you will need and the Social Security benefits you will receive should come from savings. If you estimate that your final salary will be $ 60,000, suppose you will need $ 48,000 of total income as a retiree and your Social Security will produce $ 24,000, your retirement savings will need to provide you with $ 24,000 of total income. annual revenue. If you plan to follow the 4% rule, multiply that number by 25 and you will determine that you will need a nest egg of $ 600,000.
Knowing the truth about Social Security allows you to do this calculation accurately so you don’t end up with a financial deficit that destroys your retirement security.