Social Security benefits are an important source of income for most retirees. But if you plan on these benefits providing you with enough to live on as a senior, you're likely to face some really serious financial struggles.
While it may be tempting to rely on these guaranteed benefits to fund your life of leisure in retirement, there are three big reasons why that just isn't going to work out.
1. Social Security is designed to replace only 40% of income
Social Security benefits were never intended to be the sole source of retirement funds, or even necessarily the primary source. They were supposed to be part of a three-legged stool, with a pension and savings acting as the other two legs necessary for financial stability.
Because these benefits weren't designed to support seniors without that other income, the formula put into place to determine benefits doesn't result in seniors receiving enough to sustain them. Under the current benefits formula, your Social Security checks are designed to replace about 40% of pre-retirement income.
You can't take a 60% cut to your pay and maintain your quality of life. In fact, most financial experts suggest you need to replace 70% to 80% of your pre-retirement salary to live a comfortable life. And research shows a significant percentage of seniors actually spend more after leaving work than they did while they still had a job.
2. Over 60% of your benefits could go to medical expenses
Many seniors begin to face age-related health issues that can lead to significant medical expenditures. And even healthy seniors generally need medical care to ensure they stay that way. Medicare provides help with the costs, but experts advise seniors to plan for spending a small fortune on their care even with this government-provided coverage.
Thanks to high out-of-pocket expenses and care not covered by Medicare, you may end up devoting a good portion of your Social Security funds to paying doctor and pharmacy bills. In fact, a survey conducted by Nationwide revealed the average seniors who claimed Social Security benefits at 62 could end up spending 64% of their checks on healthcare.
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If you're relying on Social Security and so much of your money disappears due to essential healthcare costs, you'll have almost nothing to live on.
3. Benefits aren't keeping pace with inflation
When you start getting Social Security checks, it may seem as if you can survive on them if you maintain a strict budget and stay reasonably healthy. Unfortunately, even if things go well, making ends meet is going to get harder as you age.
That's because Social Security raises aren't really keeping pace with rising prices. Cost of living adjustments -- the periodic raises given to Social Security recipients -- are calculated based on a financial index called CPI-W, which assesses how much the cost of living is rising for urban wage earners and clerical workers.
Because CPI-W focuses on people with very different lifestyles than most retirees, it doesn't accurately account for price increases on the things seniors tend to spend the most money on -- including medical care and housing. Sadly, this means the raises provided by Social Security are generally smaller than they should be.
This has very real consequences, with research showing Social Security benefits have lost a third of their buying power since 2000. Unless the formula for cost of living increases changes in retirees' favor, those who rely on Social Security alone are likely to face increasing financial struggles as time goes on.
Don't depend solely on Social Security
As you can see, there are lots of reasons Social Security alone can't meet your needs in retirement. Start saving as soon as possible to build an investment account to supplement these benefits and ensure you have the money you need to enjoy your later years.
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