Think Social Security Will Cover Your Retirement? Here's Why That Assumption Could Backfire.

It's easy to assume that Social Security will pay for all of your needs in retirement. After all, millions of older Americans rely on those benefits today.

But you may be overestimating Social Security's role in your retirement income. And it's a mistake that could end up costing you.

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The reality of Social Security benefits

It's fair to assume that you won't have to replace your pre-retirement paycheck in its entirety once you stop working. At that stage of life, your home might be paid off and your spending needs may be generally lower.

But you shouldn't expect to be able to get by on 40% of what you used to earn. And if you retire on only Social Security, that's the reality you may be looking at.

One big misconception about Social Security is that it's designed to fully replace workers' paychecks. But you should only expect your monthly benefits to replace about 40% of your former earnings if you make a typical salary.

Once you start looking at real numbers, the limitations of Social Security may become clear. A lot of your monthly expenses won't disappear in retirement, even though some may shrink. Housing, groceries, transportation, and healthcare could easily add up to more than what your Social Security benefits cover. And the sooner you realize that, the sooner you can come up with a plan to avoid a shortfall.

Use savings to bridge the gap

You may only end up needing 70% to 80% of your pre-retirement paycheck to live comfortably as a senior. But if Social Security will only replace 40%, the remainder will need to come from somewhere -- namely, savings you build.

To that end, start funding an IRA or 401(k) consistently every month starting now so you have time to grow a nest egg for retirement. And beyond contributing toward savings, invest your money wisely. Choose a variety of stocks with strong financials, or put your money into a few S&P 500 ETFs (exchange-traded funds) if you're not comfortable choosing stocks for your portfolio individually.

Let's say you manage to sock away $300 a month for retirement over 25 years. If your investments grow 8% a year, you'll be looking at around $263,000. And from there, withdrawals from your retirement account coupled with Social Security could make it possible to pay your bills without constant worry.

Social Security may very well play an important role in your retirement. But it shouldn't be your entire income plan. The more proactive you are about saving to supplement your benefits, the better positioned you should be to maintain your lifestyle and avoid financial stress down the road.

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