Social Security is a key source of retirement income for many older Americans. You might also be counting on it to cover a big part of your expenses once you retire.
But before you sign up for benefits, there’s one important fact you need to know — and it could impact your overall retirement plan.
Know How Much of Your Income Social Security Will Replace
Many retirees struggle financially after leaving their jobs because they overestimate how much Social Security will cover.
A common misconception is that Social Security will replace most of your pre-retirement income, but that’s far from true.
In reality, Social Security is designed to replace about 40% of your wages at best. And that’s only if benefit cuts don’t happen.
If lawmakers don’t fix the program’s funding issues, future benefit reductions could lower that percentage even more.
Higher earners should expect even less than 40% from Social Security. That’s because there’s a cap on how much you can receive in monthly benefits.
If you have a high salary, you’ve likely noticed that not all of your income is taxed for Social Security. On the flip side, your benefits will max out at a certain amount, which changes each year.
That means Social Security could replace only 25%, 15%, or even less of your income, depending on how much you earn.
Don’t Rely Too Much on Social Security
Understanding how much of your income Social Security will cover can help you make better retirement decisions. First, it can guide you in choosing the right time to claim your benefits.
You can start collecting Social Security as early as age 62, but your benefits will be reduced if you claim before reaching full retirement age, which is 67 if you were born in 1960 or later.
On the other hand, you can delay your claim until age 70 to increase your benefits. For every year you wait after full retirement age, your monthly benefit will grow by 8%.
Knowing how much Social Security will cover also helps you set clear savings goals.
If you expect Social Security to cover 40% of your income but need 70% to retire comfortably, you’ll need to figure out how much to save to fill that gap.
A financial advisor can help you calculate how large your retirement fund should be.
It’s important to have realistic expectations about Social Security before you retire so you can plan properly. But even in the best-case scenario, don’t expect Social Security to replace more than 40% of your paycheck.
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