3 social security facts that might scare you
Mmillions of older people rely on social security for retirement income. But the less you know about the program, the more frightening surprises you might get. Here are some social security facts that may scare you.
1. Early declaration could reduce your benefits by 30%
The monthly social security benefit to which you are entitled at retirement is based on your personal salary history. From there, you can receive this benefit in full once you reach full retirement age, or FRA.
FRA depends on the year of your birth. If that year is 1960 or later, your FRA is 67.
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You are allowed to apply for social security from the age of 62. But for every month you apply for benefits before FRA, that income stream takes a hit. If you file a year earlier, you will lose 6.67% of your benefits. But if you file five years earlier, you’ll cut your benefits by a whopping 30% – for life.
2. Your benefits will replace only 40% of your income
Many people expect to fall back on Social Security after retirement and don’t really care about building up their own savings. But in reality, your benefits may not provide you with as much financial cushion as you would like.
If you’re an average wage earner, you can expect Social Security to replace around 40% of your pre-retirement income. But most seniors need around 70-80% of their previous earnings to live comfortably. And so, if you can’t retire with your own savings, you could really have a hard time meeting your expenses.
3. Benefits could be reduced in just over 10 years
Social Security needs money to operate, and it gets a lot of that money from payroll taxes. But in the years to come, those incomes are expected to decline as baby boomers leave the workforce and too few people enter to replace them. As such, Social Security will owe more in benefits than it collects in income.
The good news is that the program has trust funds that it can plunder to cover its deficit – that is, until that money runs out. According to program administrators, this is expected to happen by 2034. And at that point, Social Security may have to cut benefits across the board, leaving current and future beneficiaries in a bind.
Know what to expect from social security
All these tidbits of information on Social Security are far from comforting. They are also reality.
If you want to avoid financial stress during your retirement, it’s important to understand how Social Security works and what to expect from the program. Applying for benefits too early could leave you with much less income in life, and relying too much on these benefits could leave you in a position where you will not be able to pay your bills.
While there is nothing you can do individually to avoid benefit cuts, you can offset them by setting money aside for retirement in an IRA or 401 (k) plan. This is something you should do even if lawmakers find a way to avoid reduced benefits.
If you play your cards right with Social Security, it could serve you well throughout your retirement. But if you don’t read the program and plan for its shortcomings, your retirement years could end up being a lot darker than you want.
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