The Social Security Fact Many Future Retirees Learn Too Late

For many Americans, Social Security is central to their retirement plans, and they're anticipating these benefits to become a key income source. Despite this, however, future retirees often don't know basic facts about the program.

This is a problem if you anticipate that Social Security will do more for you than it actually will. There is one key fact many future retirees learn too late, and not knowing it can create a significant risk of financial hardship.

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What every future retiree needs to know

Future recipients need to know that Social Security benefits are designed to replace only about 40% of pre-retirement income. So if you are counting on it to be a major or primary source of income in your later years, not understanding this detail can be a huge problem. You would either face a 60% cut to your income at a time when your healthcare costs might be going up substantially due to age, or you would need other money beyond Social Security to live on in your later years.

How much do you need to supplement Social Security?

If Social Security is only going to replace 40% of your income, then you must make a retirement plan that takes this factor into account. Specifically, you must decide how much of your income you want to replace and how much you must have invested in a 401(k) or other retirement account to live comfortably as a senior.

Traditionally, many experts recommend replacing around 70% to 90% of your pre-retirement earnings. You may want to err on the higher end of this, or even try to replace 100% of what you were making, if you hope to enjoy a lot of expensive hobbies in retirement, like traveling.

Once you know what percentage of income to replace, you can work backward from there and see how big the balance of your retirement plans needs to be. If you'll be making $100,000 when you retire and want to replace 80% of that total, your Social Security benefit would likely need to provide around $40,000, and your 401(k), IRA, or other accounts must give you another $40,000.

If you plan to follow the 4% rule, multiply whatever income amount you need by 25, and that will give you the details on how big your nest egg must be. In this case, that would be $1 million to generate $40,000 in income.

The bottom line is that once you understand that the program will only replace 40% of your pre-retirement income, you can do the necessary math and set the right retirement savings goals. If you learn this too late and assume Social Security will do more for you than it can, you may end up saving far too little. Don't let that happen to you.

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