Social Security: 3 major problems you should be aware of | Smart Change: Personal Finance
Many of today’s seniors rely heavily on Social Security to cover their living expenses in the absence of a paycheck. But you may want to take a different approach to your retirement money.
While Social Security is a useful program, it is not without problems. Here are three main problems you should be aware of.
1. Your benefits will not completely replace your income
Many people assume that the monthly benefit they receive from Social Security will be equivalent to their previous salary. But this is just a mistake.
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If you’re a middle-income earner, you can expect Social Security to replace about 40% of your pre-retirement income. If you’re an above-average earner, your benefits may provide a lower alternative income, in percentage terms. If this is something you don’t know and don’t take into account in the context of retirement planning, you could end up with a serious financial shortfall on your hands.
2. Cost of living adjustments are often insufficient
Social Security benefits are subject to annual cost-of-living adjustment, or COLA, that is associated with inflation. But often, these entities are not able to keep up with inflation, even though they are based on it.
This year, for example, Seniors on Social Security saw their benefits increase by 5.9%. But the inflation rate has well exceeded the 5.9% mark for months, leaving beneficiaries at a disadvantage.
3. Benefits may be cut off
Social Security is facing a funding shortfall. In the coming years, expect to owe more scheduled benefits than you collect in revenue as baby-boomers exit the workforce at short notice.
Social Security has trusts that it can tap into to make up for this shortfall. But once that money runs out, cuts to Social Security benefits will be on the table.
Now, remember how we just said Social Security will only replace about 40% of pre-retirement wages? Well, if the benefits are reduced globally, these benefits will provide less alternative income.
Moreover, while some people are convinced that lawmakers won’t allow benefit cuts to happen, Social Security trustees have been warning of a shortage for years, and so far, no one has done anything about it. So while there is an opportunity for lawmakers to step up and block interest cuts, you can’t count on that.
Don’t just rely on Social Security
There is nothing wrong with calculating Social Security in the personal retirement income equation. But don’t make the mistake of thinking that you can roll back those benefits alone or expect the vast majority of your retirement income to come from them.
Not only may this leave you with an insufficient amount of money as a senior, but you may actually struggle financially if the benefits cuts really go down. Instead, aim to rank other sources of income to supplement those benefits, whether that’s a good IRA balance or a job that you continue to hold in some capacity once your main career is over.
At the same time, it’s helpful to start thinking about ways you can claim Social Security strategically so that you can get the most out of your benefits, whatever they may be. Waiting until retirement approaches to come up with a recording strategy can lead to giving in to stress and making what ends up being the wrong call.
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