Most Americans likely envision Social Security as an essential source of financial support as they think ahead of retirement. That said, most retirees do end up depending on the program’s benefits to give a considerable part of their take-home earnings.
Nonetheless, while one counts on Social Security to be there for them throughout their retirement years, one should not look forward to solely living on such benefits from the U.S. federal government.
COLA is not keeping up
One of the reasons you shouldn’t rely on Social Security benefits alone is that the cost-of-living adjustments are not keeping pace with inflation.
Attempting to live by Social Security alone will most likely struggle in late retirement. This is because the benefits’ value is somewhat chipped away every year. This occurs because the COLA seems to be slacking off from what is intended to do, The Motley Fool writes.
COLAs are devised to make sure that benefits like the ones in Social Security keep up with inflation, though this is not felt by beneficiaries, not to mention that around 30 percent of the benefits’ purchasing power has been lost since 2000.
Americans are well-aware by now about the largest COLA bump in forty years – 5.9 percent. However, even this may well seem to be below the actual rate of inflation the retirees’ experience. This would result in them falling further behind, albeit receiving the biggest COLA in decades.
Only 40 percent
Another one is that these benefits are intended to fill in 40 percent of the preretirement income. This has been deemed the main reason folks cannot live on Social Security alone – retirees aren’t meant to.
For the uninitiated, Social Security benefits are calculated using a formula that decides the recipient’s amount. It will depend on the average earnings in a person’s 35-highest earning years. That said, a recipient receives benefits equivalent to a percentage of those earnings. Depending on the manner the said formula is designed, a person is expected to receive about 40 percent of what they’re earning prior to their retirement.
This translates that if a person relies solely on Social Security, he/she will end up taking a 60 percent pay cut upon retiring. Further, even in retirement, most people cannot live on just 40 percent of what they usually get paid for due to the reality that the necessities outweigh the said amount.
Retiring before claiming
Lastly, an individual may need to retire prior to claiming their benefits. Sure, the checks from Social Security are accessible by the time a beneficiary reaches 62. It’s worth noting, however, that employees could be forced out of their jobs due to the scarcity of work opportunities available to aging Americans or due to family or health issues.
Even if folks reach the age as mentioned above, they may still want to claim their benefits immediately when they leave the workforce. That’s because benefits increase for every year an individual begins to wait until their 70 to receive their first Social Security check.