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Why You Shouldn't Solely Rely on Social Security for Retirement Income Thumbnail

Why You Shouldn't Solely Rely on Social Security for Retirement Income

Financial Planning

Social Security is an important source of income in retirement and is a critical aspect of financial security for many Americans. While Social Security provides a valuable safety net for retirees, it is important not to rely solely on this income source. In this article, we will explore the reasons why depending solely on Social Security for retirement income can be risky and the steps you can take to ensure a more secure financial future.

1. Social Security Benefits are Limited in Size

One of the main reasons why relying solely on Social Security for retirement income is not advisable is that the average monthly benefit is often lower than what most people expect. While the current average monthly benefit is $1,503, which amounts to $18,036 annually, it will not be enough to cover all living expenses, especially if you are accustomed to a higher income level during your working years. This is particularly true if you have dependents or if you have significant healthcare costs to consider.

2. Benefits May Be Reduced in the Future

Another factor to consider is the future of Social Security. The program is facing significant financial challenges due to the aging population and the decline in the number of workers paying into the system. The Social Security Board of Trustees has projected that the trust funds will be depleted by 2034, resulting in a potential reduction of benefits by 23%. This means that future retirees may receive less in Social Security benefits than current retirees, further emphasizing the importance of having additional sources of retirement income.

3. Lack of Flexibility and Features

In addition to the limitations in benefit size and potential future reductions, Social Security benefits also lack certain features that are available with other retirement accounts. Unlike retirement accounts like 401(k)s or IRAs, you cannot withdraw all the funds at once or take out loans against your Social Security balance. This lack of flexibility can make it challenging to cover large expenses or unexpected medical bills during retirement. It highlights the need for additional savings during your working years to ensure financial stability in retirement.

4. Uncertainty Surrounding the Future of Social Security

The future of Social Security is uncertain, and the program's financial challenges further contribute to this uncertainty. While the Social Security Administration has proposed ideas to increase revenues and address the funding gap, there are no guarantees that these proposals will be implemented. With the trust fund projected to be depleted in the next decade, there is a possibility that benefits may be reduced, leading to potential financial difficulties for retirees. 

I personally, believe Congress will take the necessary steps to fix the program such as pushing the retirement age out or raising taxes to fund it. But why would you risk everything by having Social Security be your main source of income. In investing, we teach you to “not put all of your eggs in one basket” so why would you do it with your retirement income sources?

5. Personal Circumstances and Forced Early Retirement

Relying solely on Social Security for retirement income may not be feasible if you are forced into early retirement or if you face personal circumstances that prevent you from working until full retirement age. While you can claim Social Security benefits as early as age 62, doing so will result in a reduced benefit amount. If you are forced to retire before you are eligible for full benefits, you may face financial challenges without an additional income source.

6. The Importance of Personal Savings

Given the limitations and uncertainties surrounding Social Security, it is crucial to prioritize personal savings for retirement. Social Security should be viewed as a supplement to your retirement income rather than the primary source. By saving and investing in retirement accounts like 401(k)s or IRAs, you can build a nest egg that provides greater financial security and flexibility in retirement. Also, consider investing in an after tax brokerage account in order to further diversify your retirement income sources in the future.

Having a bucket of after tax dollars as well as cash in your emergency fund will enable you to do Roth conversions in your gap years (the years between retirement and when Required Minimum Distributions start).

7. Creating a Comprehensive Retirement Plan

You have heard me say it before, but it’s so important to have a financial plan in place to guide you through retirement. Your plan needs to go beyond relying solely on Social Security. This plan should include a combination of personal savings, investments, and other sources of income such as pensions or part-time work. The financial plan we create for you is custom tailored to align with your goals and unique situation.

8. Steps to Enhance Retirement Savings

There are several steps you can take to enhance your retirement savings and reduce reliance on Social Security:

  • Start saving early: The power of compounding can significantly impact your savings over time. Starting early allows your investments to grow and accumulate wealth for retirement.
  • Contribute to retirement accounts: Maximize contributions to retirement accounts such as 401(k)s or IRAs. Take advantage of employer matching contributions and tax benefits.
  • Take advantage of catch up contributions: As soon as you turn 50 you are allowed to contribute more money towards your 401(k) and IRA. Make sure to take advantage of this extra savings amount to beef up your retirement portfolio.
  • Diversify your investments: A well-diversified investment portfolio can help mitigate risk and maximize returns. Consider a mix of stocks, bonds, and other assets that align with your risk tolerance and goals.
  • Control expenses: Keep track of your expenses and identify areas where you can cut back to save more for retirement. Small adjustments can make a significant difference over time. We love ETF’s around here (Exchange Traded Funds) because they offer low cost diversification to globally diverse markets and they trade for free.
  • Consider additional income streams: Explore opportunities for additional income, such as part-time work or starting a side business. This can provide supplemental income during retirement.

10. Stay Informed and Adapt

We will keep you informed about changes and updates to Social Security laws and regulations that may impact you. Understanding how these changes may affect your retirement benefits can help you make informed decisions. Additionally, regularly reviewing and adjusting your retirement plan as your circumstances change is crucial to ensure it remains aligned with your goals. That’s what we are here to help with.

11. Take Action Today

Preparing for retirement requires proactive steps and long-term planning. We always start by assessing your current financial situation, helping you set goals, and developing a comprehensive retirement plan. By taking action today, you can build a solid foundation for a financially secure and fulfilling retirement.

12. Conclusion

While Social Security is an essential income source for retirees, it should not be relied upon as the sole means of funding your retirement. The limitations, uncertainties, and potential future changes to the program highlight the need for additional savings and a comprehensive retirement plan. By taking control of your financial future and prioritizing personal savings, you can enjoy a more secure and comfortable retirement. If you have questions or concerns around your Social Security benefits and strategy around this income source, please do not hesitate to contact me and we can help you navigate the process.

This commentary reflects the personal opinions, viewpoints and analyses of the Seaside Wealth Management, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Seaside Wealth Management, Inc. or performance returns of any Seaside Wealth Management, Inc. client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Seaside Wealth Management, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.