When you envision retirement, imagine living a pretty frugal lifestyle — one that your Social Security benefits can afford. But in reality, retiring Social Security alone is a dangerous move. This is why.
1. Benefits may decrease
The average Social Security senior will be eligible for a monthly benefit of $1,657 upon retirement in 2022. But over time, those benefits can diminish across the board.
Social Security is expected to spend more than it brings in in revenue in the coming years, as baby boomers stage a mass exodus of the workforce and workers run out of work to replace them. The program may tap its trust funds to make up for that shortfall for a while, but by 2034 those cash reserves are expected to dry up. Once that happens, significant cuts to benefits could be on the table.
Based on your salary history, you may expect a certain benefit from Social Security. But if lawmakers don’t get their heads together and figure out a way to address Social Security’s financial problems, you could end up with a lot less money than expected.
2. Your benefits will not replace your entire salary
Even if Social Security benefits are not reduced in the future, they will still only replace about 40% of your pre-retirement salary if you are an average earner. Now you may have the intention of living a stripped-down lifestyle once your career comes to an end. But do you really think you can get away with less than half of your former income?
That’s a really big order considering how expensive? healthcare only may be retired. And those are really not negotiable costs.
3. Benefits generally can’t keep up with inflation
Last year, the Senior Citizens League reported that Social Security benefits have been lost a whopping 30% of their purchasing power since 2000. And one major reason comes down to stingy adjustments to the cost of living, or COLAs.
Each year, benefits are eligible for a COLA, which aims to ensure that Social Security seniors can maintain their purchasing power as the cost of living rises. In 2022, seniors will get their biggest raise in decades — a 5.9% increase. But in recent years, COLAs have entered at much lower levels, leaving seniors behind.
Social Security COLAs also largely ignore health care inflation, which has a significant impact on seniors. And even generous COLAs can lose their impact when Medicare costs rise a lot and eat them up. That will probably be the case in 2022 if Part B premiums are rising.
There is nothing wrong with incorporating Social Security into your retirement plans or even relying on it as a substantial source of income. But don’t make the mistake of thinking you’ll do just fine if you only have to live on those benefits. Instead, do your best to get a retirement nest egg, and if it’s too late for that, plan to work part-time as a senior to give yourself a more generous income than what Social Security alone can provide.