Counting on Social Security in Retirement? Think again.

Social Security is an important source of income for millions of retirees. According to a 2022 report from the Transamerica Center for Retirement Studies, nearly a quarter of workers expect their benefits to be their primary source of income upon retirement.

But Social Security is designed to replace only about 40% of your pre-retirement income. And in recent years, benefits have lost purchasing power and become less reliable. If you plan to rely on Social Security during your retirement, you may need to reconsider that strategy.

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How far does Social Security go in retirement?

According to the most recent data from the Social Security Administration (SSA), the average retiree receives about $1,669 per month from the program. That works out to just over $20,000 a year.

Also keep in mind that your benefits may be subject to both state and federal taxes. There are currently 12 states that tax Social Security, and depending on your income, you may also owe federal taxes up to 85% of your benefit amount.

Inflation has also taken its toll on Social Security and as a result your benefits will not go as far as they used to. According to a 2022 report from the advocacy group The Senior Citizens League, checks have lost about 40% of their purchasing power over the past two decades. As inflation continues to rise, this problem could worsen over time.

As if that wasn’t tough enough, there could also be cuts to benefits looming. The SSA is in short supply, and according to the most recent projections, benefits could be reduced to 23% by 2034 if Congress cannot agree on a solution before then.

All of these factors will make it difficult (if not impossible) for most people to survive on Social Security alone after retirement. Even if you have other sources of income, your benefits may not go as far as you expected.

What can you do to prepare?

Despite the challenges the program faces, it is still possible to retire comfortably. But you need the right strategy.

One of the best ways to prepare is to simply save more in your retirement fund. This is often easier said than done, especially in difficult economic times. But even a little saving can go a long way.

For example, say you invest an additional $100 per month while earning an average return of about 7% per year. After 10 years, you’ve accumulated about $16,500, which is nearly a year’s worth of Social Security benefits for the average retiree.

Another option is to wait a few years before applying for benefits. Suppose you have a full retirement age of 67, and by applying at that age you will receive $1,600 per month. If you start claiming at age 62, your benefit will be reduced by 30%, leaving you with $1,120 per month.

But if you wait until age 70 to file, you’ll get your full benefit plus an extra 24%. That’s $1,984 a month — a whopping $864 more than you’d receive by submitting your 62. If your savings are short, deferring benefits can be a smart move to increase your income.

Social Security benefits can be a lifeline for many retirees, but it’s wise to have a backup plan. Prepare now and you can protect your retirement no matter what happens to Social Security.

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