If you're tired of constantly reading about the importance of saving for retirement, you're probably not alone. But there's a reason people in the personal finance space are so quick to encourage workers to build savings rather than retire on Social Security alone — they don't want to see folks struggle once their senior years arrive.
You may be inclined to think that you'll get by just fine in retirement even if Social Security ends up being your sole income source. But here's why you really should not be planning to retire on Social Security by itself.
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1. Your benefits won't come close to replacing your pre-retirement income
One big reason some people are convinced they'll get by on just Social Security in retirement might boil down to a misunderstanding of how much replacement income those benefits offer. Generally speaking, the amount of money you get from Social Security each month will replace 40% of your pre-retirement paycheck. This assumes you earn an average wage.
It's one thing to get by in retirement on 70% or 80% of your former income. That may be more than doable, especially if your home is paid off by then and you're willing to live pretty frugally. But a 60% pay cut is a very different story.
2. Benefits might get cut broadly in the future
Right now, you can expect Social Security to replace about 40% of your pre-retirement wages. But if benefit cuts come down the pike, you'll have even less replacement income to fall back on.
Social Security's trust funds could be out of money as soon as 2034.
Once that happens, the program may be forced to slash benefits universally in the absence of having enough revenue to pay them at 100%. So if you think a 60% pay cut is bad, imagine having to live on even less than 40% of what you earn today.3. Your retirement expenses may be higher than expected
You might run the numbers and decide that you can get by on Social Security alone despite the massive pay cut at hand. But you might also be making assumptions about your retirement expenses.
Let's say your home will be paid off in time for retirement. You might assume you'll spend much less on housing at that point. In reality, it's possible that your property taxes will rise substantially and that your home will require much more upkeep due to aging, resulting in virtually the same expense as a mortgage payment.
You might also assume that you won't have as many social obligations in retirement and can save money by virtue of that. But while you may not have quite as full a social calendar, you'll also have many hours to fill during the day when you're no longer working. And filling those hours could cost money — more than you might expect. So it's best to have income outside of Social Security, so you can stay busy enough to avoid mental health issues.
It's easy to see why you might think it's fine to retire on Social Security alone. But doing so could make you utterly miserable during your senior years. Instead of sentencing yourself to that fate, make an effort to build a nest egg during your working years. You don't necessarily have to retire with $1 million. But do aim to retire with enough money to supplement your benefits nicely.
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