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Social Security: Nearly Half of Americans Don’t Know This Key Fact

There are different sources of income that you could have during your retirement. These could include withdrawals from an IRA or 401(k), pension payments, and earnings from part-time employment.

But chances are, Social Security will be an essential source of income once your time in the workforce is over. It is therefore important to understand the income that these benefits will provide you.

Unfortunately, many people are led to believe that Social Security will pay them enough money to fully replace their salary. And that’s a misconception that could leave many retirees strapped for cash.

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Get Real About Social Security

If you have an average income, you can expect Social Security to replace about 40% of your pre-retirement salary. That, however, assumes that the benefit cuts don’t trickle down to the pike. If reductions are implemented, Social Security will likely replace a much smaller percentage of your former income.

In a recent Nationwide Retirement Institute report, 49% of Americans did not know what percentage of their income Social Security would replace in retirement. But it is important to have a good idea of ‚Äč‚Äčthis figure.

You see, most seniors end up needing 70-80% of their old income to live comfortably after their career is over. Clearly, there is some wiggle room with these percentages, as seniors who choose to downsize and live frugally could manage to get by on a lot less. But for the most part, to maintain the same standard of living, it takes most of your old salary.

Social Security, however, can only provide about half the retirement income you need to live comfortably, based on the aforementioned percentages. And the sooner you recognize this, the sooner you can take steps to address it, namely by increasing your personal savings rate to build yourself a solid nest egg. If you decide you want to settle down with 80% of your old paycheck and Social Security will only provide half that amount, with a strong enough IRA or 401(k), your savings could fill that whole gap.

In addition to knowing how much of your pre-retirement income Social Security will replace, it’s also a good idea to get an estimate of your monthly retirement benefit. You can do this by creating an account on the Social Security Administration website and accessing your most recent income statement.

But keep in mind that if you’re only, say, halfway through your career, this estimate may not be as accurate. This is because your monthly Social Security benefit will depend on your earnings during your 35 best-earning years in the labor market. If you only have 20 years of work under your belt, there will be a lot of missing data in this calculation.

Even so, getting an estimate of your monthly benefit could be a good start in your retirement planning. That, combined with knowing how much of your old income your benefits will likely replace, could set the stage for better planning and help you avoid a scenario where money is perpetually tight.

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