Essential Information Regarding Social Security that Every Individual Should Understand Prior to Retirement
Millions of elderly individuals in the United States receive monthly payments from Social Security, often serving as the deciding factor between affording necessities in retirement or falling short. Pre-retirement, you may have certain expectations about your Social Security income, yet it's crucial to base these on facts rather than assumptions.
What's the income from Social Security going to be like?
One common misunderstanding about Social Security is that your monthly benefits will almost fully compensate for your pre-retirement income. High earners might find that their benefits fail to match their former paychecks significantly, while average wage-earners may only receive benefits that account for about 40% of their former salary.
This potential 60% income drop could lead to a lifestyle that's unsuitable for you. Consequently, relying solely on Social Security in retirement is not advisable.
Additionally, delaying the submission of a Social Security claim could lead to increased benefits, intended to replace a larger portion of your income. However, consideration must also be given to potential Social Security reductions, which might become prevalent within the next decade if politicians do not address the program's financial issues. Therefore, delaying your filing should not be your sole plan B.
Prepare for retirement to avoid financial difficulties
There are countless individuals who retire on Social Security alone, yet struggle financially as a result. If you aspire for a different retirement experience, take measures to save while still employed.
There's no need to contribute 15% to 20% of your paycheck to an IRA or 401(k) plan, as suggested by experts, if that's financially unfeasible for you. Instead, create a budget and identify a reasonable, yet significant monthly sum to contribute towards retirement. Maintain consistency with this amount.
For instance, you may find that you can comfortably contribute $250 monthly to an IRA or 401(k), resulting in an annual contribution of $3,000. Over a 30-year period and maintaining an 8% yearly return during that time, which is slightly below the stock market's average, you would amass a nest egg of approximately $340,000.
This sum might not guarantee a life of opulence, but combined with Social Security, it could prevent you from slipping into financial hardship during retirement. And there's nothing wrong with that scenario.
Assuming that Social Security will replace the majority of your pre-retirement income is one of the most detrimental errors you can make while planning for your golden years. Recognize to which extent (or lack thereof) Social Security will provide for you, and then take steps to save so you aren't compelled to make drastic cuts to your lifestyle once you retire.
Saving for retirement is crucial to avoid relying solely on Social Security, which might only account for about 40% of your pre-retirement income for many individuals. Delaying the submission of a Social Security claim can potentially increase benefits, but it's important to consider potential reductions in the future due to financial issues facing the program.
To avoid financial difficulties in retirement, it's not necessary to contribute a large percentage of your paycheck to retirement savings, but instead, identify a reasonable monthly sum and maintain consistency with it. This consistent contribution, even if small, can grow over time and, when combined with Social Security benefits, could prevent financial hardships in retirement.
