Social Security Is Designed to Replace This Much of Your Income (and It's Not Even Close to 100%)

Social Security is, for millions of Americans, a vital source of income during retirement. According to the Center on Budget and Policy Priorities (CBPP), the mere fact that Social Security benefits are paid out to more than 41 million retired seniors each month has pushed the rate of senior poverty below 9%. Without Social Security income, the CBPP estimates that the poverty rate for seniors would be north of 40%!

However, most working Americans, and even some retirees, don't have a good idea of what percentage of income Social Security is designed to replace once you retire, and that's a big problem. If seniors wind up relying on Social Security too heavily during retirement, they run the risk of experiencing a monthly "sticker shock" if the program ever faces benefit cuts.

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Social Security is designed to replace this much of your working wages

It's worth noting that the Social Security Board of Trustees has projected that the Social Security Trust will have completely exhausted its more than $2.8 trillion in spare cash by the year 2034, necessitating what it estimates will be a 21% across-the-board cut in benefits. In other words, if you're heavily reliant on Social Security, your monthly income could take a substantial hit in less than two decades. Worse yet, if you've claimed benefits before reaching your full retirement age (the age where the SSA deems you eligible to receive 100% of your monthly benefits), your already permanently reduced payout could be slashed even more.

Data from the Social Security Administration (SSA) shows that 61% of retired workers count on their benefits to provide at least half of their monthly income. For unmarried elderly individuals this figure jumps to 71%.

Yet according to the SSA, Social Security benefits are only truly designed to replace about 40% of the average worker's wages during retirement. Based on the $1,363.66 that the average retired worker receives each month (as of Feb. 2017), or $16,364 a year, this means around $24,000 in additional annual income (approximately 60%) should be derived from other sources aside from Social Security (e.g., a pension, 401(k), IRA, or some other retirement or investment account).

Understand that this figure has some leeway based on what a worker earns during his or her lifetime. An individual who earned an average of $150,000 a year is capped by how much they can receive monthly from Social Security ($2,687 in 2017). Thus, higher-income individuals will see around 25% of their income replaced by Social Security and, in some instances, they may not even be reliant on this added income at all. Conversely, low-income individuals could see around 55% of their working wages replaced by Social Security income during retirement.

What isn't OK, based on the SSA's recommendation, is relying on Social Security to provide a significant portion of your monthly income (60%+). Doing so runs the risk of being at the mercy of a possible benefits cut in the not-too-distant future.

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Reduce your reliance on Social Security by taking these steps

While there could be a smorgasbord of reasons why seniors are so reliant on Social Security income once they retire, it's likely a function of America's poor saving habits. According to the St. Louis Federal Reserve, the personal saving rate in Feb. 2017 was just 5.6%, which is less than half of what it was 50 years ago. This is well below the 10% to 15% savings rate that financial advisors recommend.

One exceptionally simple solution to reduce your Social Security reliance is to save more -- and the best way to achieve that is to formulate a budget. Gallup found in 2013 that only a third of U.S. households keep a detailed monthly budget, which is a clear problem that needs to be solved.

Formulating a budget is exceptionally easy nowadays since it can be done entirely online, and in many cases for free. You may even be able to plug in how much you'd like to save within a month and have budgeting software help you derive a plan to reach your goals.

Perhaps the toughest step in the budgeting process is sticking to your plan. Though there are a number of tips that can help you stay on track, setting up a monthly automatic withdrawal to a savings or investment account should help keep you to your budget and give you the best chance for success. It also removes one of the biggest excuses for not saving money -- "I'll do it later."

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Aside from just budgeting better, workers need to do a better job of taking advantage of so-called free money. More companies than ever are offering 401(k)s in the workplace in an effort to help retain talent, as well as prepare employees for the rising costs of retirement. Not only are there more 401(k) options, more employers are matching a percentage of their workers' salaries (usually around 3%). This free money can compound over time, helping to reduce workers' expected reliance on Social Security.

Workers also need to be willing to place their faith back into the stock market. A Gallup poll from April 2016 found that just 52% all Americans own stocks, which matched an all-time record low. For context, 65% of all Americans owned stock prior to the Great Recession. While the stock market has undoubtedly had some wild swings, it's also been among the steadiest wealth creators over the long run. Historically, the stock market has gained 7% a year, inclusive of dividend reinvestment. Workers should start investing in the stock market early and with regularity if they hope to build a nest egg big enough that they aren't reliant on Social Security when they retire.

If you don't take heed of the SSA's recommendations, you may live to financially regret it.

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