5 Reasons I'm Not Making Social Security a Huge Part of My Retirement Plan

Many retirees rely heavily on Social Security to help them make ends meet. While I expect that I'm likely going to collect benefits, I am not making Social Security a major part of my retirement plan.

There are a few simple yet important reasons why that's the case. Here are some of the key issues that have me concerned about relying on Social Security for too much of my income.

Social Security is only designed to replace a portion of pre-retirement income

One of the biggest reasons that I'm not planning to rely on Social Security too much is that this benefit program simply isn't intended to be a major income source. In fact, while most experts recommend replacing around 70% to 80% of pre-retirement income at a minimum, Social Security is only designed to replace around 40%.

I don't want to make drastic cuts to my lifestyle. In fact, I'm probably aiming to spend as much or more than I'm currently spending as a retiree because I want to travel more. So, I can't rely too much on a benefit program that caps me at replacing just 40% of what I was earning.

Social Security's trust fund means benefit reductions are on the table

I'm also not relying too heavily on Social Security because I don't anticipate getting 100% of the benefits that Social Security has said I should expect.

The problem is, I'm not retiring for at least 15 to 20 years, or potentially even longer. And Social Security's trust fund (the OASI trust fund) is projected to run out as soon as 2032. If this is allowed to happen, it will mean a 22% cut to benefits happens automatically.

I can't control when or if a benefit cut occurs, and I don't want to count on Social Security as a major source of income, only to discover that I only get 78% of the amount I'd built my budget around.

Social Security isn't keeping pace with inflation

A third reason I'm not relying too much on Social Security is that de facto cuts are happening most years, even without accounting for the issues with the trust fund and the big benefits reduction that could be coming in the future.

The problem is that Social Security's cost-of-living adjustment (COLA) uses a formula that many people believe is flawed. The COLA formula is based on third-quarter changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). But urban wage earners and clerical workers don't spend as much as seniors in areas with especially high inflation, like housing and healthcare.

The result is that the COLA often provides a benefits increase below the amount of inflation retirees are actually experiencing. The Senior Citizens League reports that benefits have lost 13.7% of buying power just since 2016, and this trend is likely to continue.

I don't want to count on Social Security to support me, only to find that I can't buy what I need with my benefits later in retirement because inflation has eaten away at the value.

I'm probably going to lose some of my Social Security to taxes

It's not just the amount of Social Security benefits you collect that matters. You also need to consider the amount you actually take home. That means factoring in the impact of taxes on benefits.

Unfortunately, a good portion of my Social Security benefits will likely be subject to tax, so some of this money will go to the IRS. The threshold at which benefits become subject to tax is just $25,000 for a single tax filer and $32,000 for married joint filers. And once provisional income hits $34,000 for single filers and $44,000 for married couples filing jointly, up to 85% of benefits are included in taxable income.

While this is provisional income (half of all Social Security, all taxable and some non-taxable income), the thresholds don't adjust for inflation each year. More retirees end up owing every year, and by the time I retire in a few decades, it's very likely that I will owe tax on as much as 85% of my benefits based on what my income is likely to be.

This will reduce even further what these benefits can do for me.

Potential future rule changes make accessing benefits uncertain

Finally, I'm not relying on Social Security as a major part of my retirement plan because the future of the benefits program is entirely out of my control. Lawmakers could change the full retirement age to deal with the shortfall, introduce means-testing of benefits, make COLAs smaller, or make a number of other changes that would adversely impact when I can collect my benefits and how much I'll receive.

I don't want to bet my retirement security on a program that I cannot control in any way.

Bottom line

From my perspective, relying too much on Social Security would be a major financial mistake. Instead of anticipating that these benefits are going to play a big role in supporting me, I'm focusing on saving and investing for the future so I can build a generous 401(k) balance.

Whatever I happen to collect in Social Security will be extra money that I can use to do more fun things in retirement, but I'm saving enough to make sure my basic needs are covered from my own funds rather than hoping the benefits will come as promised when I need them.

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