I have several friends whose retirement plan is to collect Social Security and, well ... that's about it. Now trust me when I say that I've tried -- repeatedly -- to talk some sense into them and explain that retiring on just Social Security is far from optimal. But the way they see it, since plenty of seniors do that today, why shouldn't that same plan work for them?
There are indeed retirees today who get all their income from Social Security. But that doesn't mean those people are in good financial shape. And if you decide to retire on Social Security alone, you might end up sorely regretting it.
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You could be in for a major pay cut
These days, Social Security benefits replace about 40% of average wage earners' pre-retirement income. Higher earners typically get a smaller percentage of replacement income.
If you earn an average salary, you, too, may be in line to have about 40% of your paycheck replaced by Social Security later on. But a 60% pay cut is pretty huge.
If you're forced to live on just 40% of your income, that could mean having pretty much no money left over to pay for extras -- things like cable TV, occasional meals outside the home, and the social outings and events that might make your retirement more enjoyable. Even if you're a frugal person by nature, having to cut back that much might make you miserable.
Benefit cuts could upend your finances even more
The 40%-replacement income is what benefits look like today. But if the program is forced to move forward with benefits cuts due to a financial shortfall -- a distinct possibility based on Social Security's current fiscal status -- then you might end up with even less replacement income in retirement. At that point, forget about paying for extras -- you might struggle to cover basic expenses like housing, medication, and food.
That's why it's really best not to plan to retire on Social Security alone. If entering retirement with a $1 million nest egg isn't in the cards, so be it. But try to save something.
If you put $200 a month into a retirement plan over the next 30 years, and your investments deliver a fairly conservative 6% average annual return, you'll end up with a nest egg worth about $190,000. That at least gives you some supplemental income later in life.
It's true that some people retire on Social Security alone. But that doesn't make it a great choice for you. If you're still working, make an effort to save some money each month for retirement. You're apt to be thankful for that extra income once you realize how hard it is to stretch those monthly benefits. That way, you'll also have a cushion for those times when unexpected bills arise -- something that could happen in retirement just as it might happen today.
