3 Reasons No One Should Retire on Social Security Alone

Key Points

• There are many retirees who get all of their income from Social Security.

• Social Security will only replace a limited portion of the salary you may be used to living on.

• The program is also facing sweeping cuts, and there are real issues with Social Security's cost-of-living adjustments.

• The $23,760 Social Security bonus most retirees completely overlook ›

There are millions of older Americans today who collect a monthly benefit from Social Security. And for many, those benefits are their only source of income.

A Pew Research Center report found that in 2022, Social Security was the only source of income for 16.4 million people. But that's a financial situation you don't want to land in.

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Here's why nobody should aim to retire on just Social Security, but rather, have other income streams instead.

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1. You'll get limited replacement income

Retirees are often old to expect to need 70% to 80% of their former income to live comfortably. If you're looking to follow that rule of thumb, you can't retire on just Social Security.

Social Security will replace about 40% of your preretirement paycheck if you earn an average wage. If you earn an above-average wage, expect even less replacement income.

Now, it may be that you're planning to live very frugally in retirement, in which case the aforementioned rule of thumb may not apply to you. But even so, getting by on just 40% of your former paycheck is a pretty tough thing. Even if you're willing to try, it may not be realistic, especially when you factor in healthcare expenses.

2. Benefits cuts may be coming

Another reason you can't plan to retire on Social Security? We just talked about the fact that it'll only replace 40% of a typical paycheck. But that 40% figure assumes benefits aren't reduced broadly. And that's an assumption no one can make right now.

The Social Security Trustees' most recent report found that without lawmaker intervention, the program's combined trust funds could be out of money by 2034. At that point, Social Security may be looking at a 19% cut to benefits.

Of course, Social Security cuts are not a given, and there is a possibility that lawmakers will be able to prevent them. But that's not something to bank on.

3. Social Security COLAs tend to fall short

One final reason why it's not feasible to retire on just Social Security is that inflation is likely to erode the buying power of those benefits over time -- even though it's not supposed to.

Social Security benefits are eligible for an annual cost-of-living adjustment, or COLA. And the purpose is to make it so that benefits keep pace with inflation. But Social Security's COLA have long failed seniors due to a flaw in the way they're calculated.

Social Security COLAs are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), an index that measures price changes in common goods and services. But the CPI-W doesn't do a good job of capturing cost increases that tend to be specific to Social Security recipients like healthcare, making them fairly ineffective.

Don't just fall back on Social Security

There's nothing wrong with counting on Social Security to some degree in retirement. But those benefits should not be your only source of income.

Aim to build up a retirement nest egg by contributing to an IRA or 401(k) plan, and set yourself up with investments that provide ongoing income for your senior years, like dividend stocks. You can also look at working part-time in retirement if saving for it proves difficult.

The key either way is to have at least one major income source outside of Social Security so you don't wind up struggling financially once your retirement kicks off.

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