If you are in your 20s or 30s, social security may not exactly be on your radar. Not only can retirement be many decades away, but you may be more focused on other things – like paying off education debt or saving up for a home – and you’re not ready to worry about retirement issues.
But actually, the sooner you start learning about Social Security, the better positioned you will be to prepare yourself for a safe retirement – even if that milestone is many years away. Here are a few important social security points you should know.
1. How benefits are calculated
Social security does not pay all seniors the same benefit. Instead, the benefit you are entitled to is based on a formula that takes into account your personal salary. So the more money you make, the more generous a benefit you can secure yourself.
But it is not only earnings from your main job that count for social security purposes. If you decide to increase your income with a side job, these salaries will also take into account your future benefits. Therefore, if you decide whether the extra bustle is worth it, consider the fact that it can do more than just put more money in your pocket in the short term – it can also set you up with a higher retirement income stream.
2. What percentage of your income is it likely to replace
Many people mistakenly assume that social security will replace their entire paycheck when they retire. In fact, you can expect these benefits to replace about 40% of your early retirement income if you are an average income earner.
However, most seniors need about 70% to 80% of their previous income to live comfortably. So relying on social security alone for retirement is a pretty bad plan.
A better effort is to consistently fund an IRA or 401 (k) plan while working. Once you start and your earnings are not much to write home about, these contributions can be minimal. But if you increase your contributions over time, you will ideally gather enough of a nest egg to provide you with the replacement income you need to enjoy retirement, instead of fighting your way through it.
Let’s say you end up pumping $ 200 a month into yours over the course of your career pension scheme, and your investments in that plan yield an average annual return of 8% (which is a few points below the stock market average). After 40 years, you will have about $ 622,000. It’s a nice sum of money to supplement your benefits with.
Get the facts now
You might think that social security is something you do not have to bother with for many years. Even though you may be decades away from signing up for benefits, it may still pay to read up on the program before retirement so you know what to expect from it. It is especially important that you recognize the social security income compensation limits – and come up with a plan to avoid a personal financial deficit in your senior years.