The Social Security system has long been a cornerstone of retirement planning, providing a safety net for millions of Americans who have paid into the program throughout their working lives. For the Baby Boomer generation, born between 1946 and 1964, Social Security benefits are often viewed as a guaranteed source of income in their golden years.

However, recent data suggests that many may be overestimating just how much they can expect to receive.

The Reality Gap

According to an annual survey conducted by the Nationwide Retirement Institute, Baby Boomers anticipate that Social Security will replace approximately 47% of their pre-retirement earnings. This perception contrasts sharply with the actual numbers.

The Committee for a Responsible Federal Budget reports that for someone earning what the Social Security Administration considers the average wage – about $60,000 per year – the replacement rate is closer to 37%. Moreover, the percentage declines as household income rises, creating an even larger disparity between expectations and reality.

The Impending Shortfall

The situation becomes even more dire when we consider the future sustainability of the Social Security program. The Social Security Board of Trustees has repeatedly warned that the trust funds supporting Social Security benefits could be depleted by the early 2030s. If no action is taken to address the projected shortfall, benefits may have to be cut by up to 24%. This would further reduce the income replacement rate for all beneficiaries, including Baby Boomers.

Why it Matters

Overestimating Social Security benefits can have serious implications for retirement planning. It could lead to inadequate savings, incorrect asset allocation, and a false sense of security. If Social Security comprises a smaller portion of your retirement income than anticipated, you may find yourself in a financially precarious position later in life. With healthcare costs rising and life expectancy increasing, having an accurate understanding of your future income streams is more critical than ever.

What Can You Do?

Educate Yourself: Take the time to fully understand your Social Security benefits by visiting the official Social Security Administration website. You can also use the retirement estimator tool to get a more accurate picture of your expected benefits.

Re-Evaluate Your Portfolio: If you have been banking on Social Security to form a significant portion of your retirement income, it may be time to re-evaluate your investment strategy. Diversify your portfolio to include a mix of equities, bonds, and other assets to reduce risk.

Consult a Financial Advisor: Professional advice can help you create a more realistic and sustainable retirement plan. A financial advisor can offer expert insights into maximizing your Social Security benefits and adjusting your investment strategy accordingly.

Consider Delaying Benefits: The longer you wait to claim Social Security (up to age 70), the higher your monthly benefit will be. This could help offset the lower replacement rate.

Plan for the Worst-Case Scenario: Given the uncertain future of Social Security, it’s wise to have a contingency plan. Save more than you think you’ll need and consider additional income streams like part-time work.

Be Proactive and Plan Now

While Social Security has been a reliable source of income for retirees in the past, the landscape is shifting. The combination of overestimation and potential future shortfalls creates a risky situation for Baby Boomer investors.

A proactive approach that includes education, portfolio adjustment, and professional guidance can go a long way in securing a more financially stable retirement.

Don’t let inaccurate assumptions about Social Security derail your retirement plans. The time to act is now.

This information should not be construed by any client or prospective client as the rendering of personalized investment advice. For more information, please visit BushWealth.com for our full disclosures.

Aaron Taylor is with Bush Wealth Management.