Getting monthly Social Security checks might seem like a dream come true: You'll have steady income without having to work for it. But the reality of Social Security isn't nearly as nice as you might imagine.
There are a few key things you should know about this benefits program if you're counting on it to help fund your retirement. And the sooner you find out about them, the better off you'll be.
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1. Benefits aren't enough to live on
If you are hoping your Social Security benefits will cover all that you need as a senior, you should rethink that plan as soon as possible.
The average monthly Social Security benefit in 2023 is going to be just $1,827. That means the typical senior will have just $21,924 in annual retirement income if relying on Social Security alone. But most people need far more than that to cover the basics.
Your own benefits will probably vary from that average based on how your lifetime earnings stacked up to your peers. But the general rule is you can expect them to replace around 40% of what you were earning while on the job.
You'll need to replace around 80% or more of your pre-retirement income to avoid a major downgrade in your living standard, so make a realistic plan for where this extra money will come from. Spoiler alert: It will most likely need to come from your savings.
2. The buying power of benefits is declining
Social Security benefits are supposed to be protected against inflation. But don't expect them to provide the same level of buying power throughout your retirement. Research has shown that benefits have lost around 30% of their value since 2000.
The method used to calculate benefit increases is imperfect. The annual cost-of-living adjustment (COLA) is based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The spending patterns of this group are different from those of seniors, so inflation experienced by retirees has been underestimated.
And benefit increases are based on CPI-W data from the third quarter of the year. If inflation surges after that time, seniors can end up falling behind because the COLA underestimates price increases over the rest of the year.
Since your benefits will buy less later in retirement, you need to make absolutely sure you have plenty of money saved to support you once your Social Security checks don't stretch as far.
3. You might have to claim Social Security earlier than anticipated
If you're hoping to maximize your monthly Social Security benefit, you could be planning to claim it at age 70, since your check keeps going up until then.
The problem is, many current retirees report being forced to leave work earlier than planned, and to claim their benefits ahead of their schedule when that happens.
Early retirement occurs for many reasons including health problems, a lack of job opportunities, or family needs. If you had planned your retirement around the big Social Security checks you'd receive at 70 but have to quit your job at 62, not only will you have a reduced retirement check but you will also have to rely on your savings for longer than anticipated.
It's crucial you're realistic about when you're likely to retire. Ideally, you should assume you'll have to be ready to support yourself by 62 with a reduced Social Security payment so you don't face a big shortfall if that's your fate.
It might be unpleasant to cope with these realities now -- especially since it means you'll probably have to save a lot more for retirement. But it's far better to deal with them while you still have time to build the financial security you deserve than to be surprised and face potential financial disaster as a retiree.
