25% of Retirees Get Less Out of Social Security Than Expected

Markets Motley Fool

Countless seniors depend on Social Security to stay afloat financially. But it turns out a pretty large percentage of recipients went into retirement with a misguided view of what those benefits would cover. In a recent Nationwide study, roughly a quarter of retirees say that their Social Security payments amount to less than they initially anticipated. And for those without an additional source of income, that shortfall could wind up being catastrophic in the long run.

Continue Reading Below

If you're still working, it's imperative that you know what to expect out of Social Security when you're older. That way, you can plan accordingly and avoid coming up short down the line.

You can't live off Social Security alone

One major misconception so many people have about Social Security is that it's possible to live off those benefits alone. In reality, those payments don't come close to covering most seniors' expenses.

In a best-case scenario, Social Security will replace about 40% of the typical worker's pre-retirement income. Most people, however, need around 80% of their former earnings to stay on top of their bills in retirement. And that 80% figure assumes a relatively modest lifestyle. Those looking to travel extensively or pursue costly hobbies will need even more. Even those without lofty retirement goals might wind up exceeding that 80% replacement income threshold -- particularly those with health issues whose medical costs eat up much of their budget. And that's why relying too heavily on Social Security is a dangerous thing -- because if you're not careful, you risk an impoverished lifestyle when you're older.

Another thing today's workers ought to know about Social Security is that future benefits could get cut if Congress doesn't take steps to address the program's impending shortfall. At present, projections tell us that the program might start slashing benefits by up to 23% as early as 2034, and while that's better than not getting benefits at all, it also renders the aforementioned 40% replacement income target inaccurate. In other words, in about a decade and a half from now, Social Security could come to provide well less than half of what the average senior needs in retirement. And that's reason enough to start getting serious about saving on your own.

Continue Reading Below

A secure retirement is in your hands

If you've been walking around thinking that Social Security will cover most of your bills in retirement, it's time to set yourself straight -- and start saving for the future. The good news, however, is that if you have a decent number of working years ahead of you, you can amass some pretty respectable savings without sacrificing too much along the way.

Currently, workers under 50 can put up to $5,500 a year into an IRA and $18,500 a year into a 401(k). If you're 50 or older, you get a catch-up opportunity that raises these thresholds to $6,500 and $24,500, respectively.

Of course, many of us can't afford to max out an IRA, let alone a 401(k). But watch what happens if you're able to set aside a mere $200 a month for the remainder of your career:

If You Start Saving $200 a Month at Age:

Here's What You'll Have by Age 65 (Assumes an 8% Average Annual Return):

25

$622,000

30

$413,000

35

$272,000

40

$175,000

45

$110,000

50

$65,000

55

$35,000

And remember, the totals assume just a $2,400 investment per year. If you can do even a bit better -- say, $3,600 a year instead -- you'll retire with that much more. Oh, and if you're wondering about that 8% return on investment, that figure is actually a bit below the stock market's average. If you load up on stocks, there's a good chance you'll do that well or better.

Relying too heavily on Social Security basically means setting yourself up for disaster. So don't make the same mistake that 25% of retirees have already fallen victim to. Take savings matters into your own hands, and use Social Security for what it's supposed to be -- a means of supplementing the healthy nest egg you bring with you into retirement.

The $16,122 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,122 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.