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The Potential Limit of Social Security

Published by Motley Fool Wealth Management on Tue, Aug 18, 2020
Social Security benefits can be a valuable income source in retirement but being too dependent on Social Security in retirement could pose a problem.

Being too dependent on Social Security in retirement could pose a problem. Here’s why.

Social Security benefits can be a valuable income source in retirement. Especially when the stock market is volatile, it can be tough to plan for the future not knowing how much your retirement fund will be worth.

Because Social Security benefits are for life, they can feel like a more dependable source of income than your investments. But there's one major risk older adults are taking when it comes to Social Security, and it has the potential to wreck their retirement.

The biggest Social Security risk you can take

Your monthly checks can go a long way toward helping you afford your ideal retirement lifestyle, but it's important not to over-rely on your benefits. About a quarter of full-time workers in the U.S. expect Social Security benefits to be their primary source of income in retirement, according to a recent survey from the Transamerica Center for Retirement Studies. And that expectation could pose a problem.

Social Security benefits aren't designed to be the primary income source in retirement. In fact, they're only supposed to replace around 40% of pre-retirement income. So if you're expecting your checks to cover the majority of your expenses, you could be in for a rude awakening in retirement.

Even if you don't expect your benefits to be your primary source of income, you could still end up depending on them more than you think. Approximately 64% of current retirees say their benefits are a major source of income, a report from the Society of Actuaries found, despite the fact that only 50% of pre-retirees expected their monthly checks to be a major income source.

In addition, there's a chance your benefits will be even less dependable in the future. Benefit cuts are a real possibility, and if you're not preparing for them now, they could put your retirement plans in jeopardy.

Social Security isn't as secure as you may think

The Social Security Administration (SSA) uses payroll taxes and money from its trust funds to pay out current retirees' benefits. But the trust funds are quickly running out of cash, and they're expected to be depleted entirely by 2034. Once that happens, the SSA will need to rely on taxes to cover benefits, and those taxes will only be enough to cover around three-quarters of future benefits. In other words, once the trust funds run dry, benefits could be cut by roughly 25%.

There are other factors that could exacerbate this problem as well. The coronavirus pandemic has resulted in mass unemployment, so there are millions of workers who aren't paying payroll taxes right now. This means the SSA may be forced to take more cash from its trust funds because it's not receiving as much as usual from taxes, resulting in those funds running dry sooner than expected.

Preparing for an uncertain future

It can be challenging to prepare for retirement when nothing is certain. A stock market crash could affect how much you're able to save for retirement, and Social Security benefits may not be as dependable as you think.

While there's no way to guarantee you'll have all the income you need to meet your goals and expenses in your senior years, you can - and should - take steps to prepare as best you can. Continuing investing and planning for retirement under the assumption that Social Security benefits will only provide 40% or less of your income are prudent steps that can help you be better positioned. You may not be able to prepare for everything, but even a little extra planning can go a long way.


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