You're Probably Thinking About Social Security All Wrong

I was talking to some friends recently about retirement savings and how it was kind of a drag to be parting with 20% of my income month after month. One friend commiserated, but a few of my friends made comments along the lines of "What savings?"

The thing is, these friends of mine are decent earners. I wouldn't say they're rolling in money, but they earn enough, in theory, to fund an IRA or 401(k) plan to a reasonable degree.

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My concern is that they're planning to retire on just Social Security. And they wouldn't be alone.

Many people enter retirement without savings and wind up heavily dependent on Social Security to cover their costs. But if you're assuming that Social Security will be able to take the place of your former paycheck, you're thinking about it all wrong.

Understand how much income Social Security will give you

It's a giant myth that the monthly benefit Social Security pays you in retirement is supposed to match your former paycheck. In a best-case scenario, Social Security will take the place of 40% of your former income. And that assumes two things: that you're an average earner and that benefits are not cut in the future.

Now, think about your current lifestyle. It may be possible to shed some expenses once you retire. But do you think you could reasonably get by on 40% of what you used to earn?

Even if you have a paid-off home and you're not commuting, do those two expenses alone take up 60% of your pay right now? Chances are they don't. So, if you end up retiring on Social Security alone, you might also end up struggling financially -- or at the very least, not having enough money to do the things you've always wanted.

Aim to save up a retirement nest egg of your own

Although plenty of people retire on just Social Security, it's not a great plan if you want to truly enjoy your senior years. Rather than doing that, try to make adjustments to your spending that allow you to carve out some money each month for an IRA or 401(k).

And it doesn't have to be a lot of money. If you're fairly young and have a good number of working years ahead of you, you can grow relatively small contributions into a large sum over time.

In fact, say you're 40 years old and want to retire at 67. If, over that 27-year period, you invest $300 a month at an 8% yearly return, which is a bit below the stock market's average, you'll be looking at about $314,000.

Of course, there are other things you can do to drum up income in retirement if you're closer to that milestone and haven't saved much. You could work part-time or rent out a portion of your home if it's large enough to do so comfortably.

But your plan for retirement shouldn't be just to sit back and collect a Social Security check every month. You might think those benefits will do a perfectly fine job of covering all of your expenses when, in reality, they probably won't even come close.

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