Three Reasons to Rely Less on Social Security for Your Retirement and Alternative Strategies to Employ
Three Reasons to Rely Less on Social Security for Your Retirement and Alternative Strategies to Employ
Retirement benefits from Social Security are provided to numerous elderly individuals each month, helping them pay their expenses without facing possible financial hardships. Although it's acceptable to take your anticipated Social Security payments into account while arranging for your retirement, it's crucial not to become excessively reliant on them. Here's why:
1. Your benefits may not suffice as much replacement income as expected
If you earn an average salary, Social Security will provide around 40% of your earlier income as a replacement. However, the majority of folks will require more income than that to maintain a comfortable lifestyle and manage their basic needs.
As a general rule, seniors should anticipate requiring approximately 70% to 80% of their prior income to handle their expenses without stress. While Social Security can assist in part, you'll need additional income to guarantee that you don't end up short of funds to cover your costs.
2. Your benefits may be reduced in the future
In the upcoming years, Social Security is estimated to owe more money in scheduled benefits than it accrues in payroll taxes. This is due to a large number of baby boomers leaving the workforce.
Social Security possesses trust funds that can temporarily cover scheduled benefits during this period. Once these trust funds run out, widespread benefit reductions may become inevitable. The program's combined trust funds are projected to be depleted by 2025.
Although Social Security reductions cannot be ruled out, it's possible that politicians may attempt to prevent them, realizing that broad cuts could lead to widespread poverty among the elderly. However, these cuts can't be ignored either.
3. Your annual adjustments for inflation are unlikely to meet your needs
Social Security payments are entitled to an annual cost-of-living adjustment (COLA), with the primary objective of enabling seniors to maintain their purchasing power as expenses increase over time. In fact, Social Security COLAs are tied to inflation, implying they should effectively help beneficiaries keep pace with rising costs.
Unfortunately, however, Social Security COLAs have resulted in a significant loss of purchasing power for seniors over the past 14 years. Since 2010, beneficiaries have seen their purchasing power decrease by 20%, according to the nonpartisan Senior Citizens League.
Unless legislation changes how Social Security COLAs are calculated, this challenge is likely to persist. Consequently, relying too heavily on Social Security in retirement becomes an additional reason to be cautious.
Diversify your income sources
Although Social Security should not be entirely excluded from your retirement strategy, it is essential to also establish alternative sources of income to avoid finding yourself short of funds. These alternate income sources could include:
- A retirement account like an IRA or 401(k) that you withdraw from
- An HSA you utilize for healthcare expenses
- A property you rent out, generating income
- An investment portfolio that provides dividends
- A part-time job or small business you run
If you can include several of these alternate income sources in your retirement, you'll have a better chance of financially thriving, regardless of Social Security's future situation.
To ensure a secure financial future during retirement, it's important to consider saving beyond your anticipated Social Security payments. A diversified portfolio can provide additional income through sources such as a retirement account, rental income, investment dividends, or a part-time job.
Given the potential reduction in Social Security benefits in the future, it's prudent to supplement your income with other sources. By doing so, you'll be better equipped to handle any potential cuts to your retirement benefits, helping you maintain a comfortable lifestyle in your golden years.