Many pre-retirees are relying too much on Social Security as the primary income to sustain them through their golden years. Are you one of them?
Financial experts have noted the average consumer tends to assume Social Security will cover much larger proportion of their income in retirement than it actually will. This leads to a decreased incentive to save as aggressively as they should, either through an employer-sponsored 401K and/or other personal investment accounts.
Social Security payments are currently received by 88% of Americans aged 65 or older, and the benefit keeps 33% of this population out of poverty, according to a report from AARP and the Financial Planning Association.
Would you like to do much better than just keeping your head above water in retirement? If so, it’s best to not depend too heavily on Social Security. Instead, meet with a financial professional to develop a personalized and strategic plan in order to maximize your retirement savings.
Here is a simple fact: Social Security is a financial lifeline that can only provide for so many people. Without some type of reform, benefits will need to be cut by 23% in aggregate in 2033, according to a recent report from the Social Security Administration (SSA). In other words, following the reduction of reserves, continuing tax income is expected to cover only 77% of scheduled benefits in 2033.
Following are a few signals you are counting on Social Security too much in order to make your retirement possible:
- Neglecting to save for retirement on your own
Do you keep making excuses for why you’re not saving for retirement?
End that habit today by forcing yourself to save with automatic contributions, so money is automatically transferred from either your paycheck or checking account to a retirement fund. This helps remove the emotional connection we have with money and over time, you won't even notice the transfers.
It’s very unlikely your monthly Social Security check will be enough to secure 20 years or more of retirement expenses. The average monthly benefit is only about $1,328 in 2015, or less than $16,000 per year. The maximum monthly benefit is currently capped at $2,663 per month. Even if you receive the latter amount, chances are you’ll still need an additional form of income.
- Dipping into your 401(k) early
Accessing funds from your company 401K in order to cover other expenses in the short-term is almost always a bad plan. Not only are there steep financial penalties for doing so, but draining this major source of your retirement fund could leave you high and dry during your golden years.
- Not taking a 401(k) match
Are you disregarding free money by neglecting to take a 401(k) match from your employer? Bad idea. It’s extremely doubtful Social Security will make up the difference between a small retirement fund and your ideal nest egg. Considering the effect of compounding returns, the longer you wait to receive your company match, the more money you potentially remove from your golden years.
- Poor financial knowledge
A recent survey from the American College of Financial Services revealed the majority of Americans are severely lacking in retirement planning knowledge. Yet more than half consider themselves well-prepared to meet their income needs in retirement. In addition to Social Security basics, the survey found a lack of knowledge in the areas of building financial security, different types of investment products, and preservation strategies. Take some time today to read articles or books on these basic financial concepts, or meet with a financial professional to see where you stand.
Bottom line: It’s time to stop counting on Social Security as a primary income source in retirement. If you’re behind on saving or educating yourself about all the financial concepts you’ll face during your golden years–especially if you’re nearing retirement age–meet with a financial professional to discuss your options.