Many Americans can’t wait to start getting Social Security checks so they won’t have to rely on working to provide income. But if you are hoping government retirement benefits will fund a secure future, you’re likely to be disappointed.
While Social Security is going to be a useful source of retirement income, it’s not a sufficient one. In fact, it’s crucial you have a realistic idea of exactly how much of your expenses these retirement benefits can cover.
Here’s what you need to know.
Social Security can’t cover all your retirement expenses. Here’s why
Social Security is likely to cover about half of your retirement expenses, or less. That’s because retirees generally need to replace a good portion of their pre-retirement earnings when leaving the workforce and Social Security isn’t designed for that.
You likely won’t need to replace the full amount you were earning prior to retirement since you no longer have to worry about saving as much. After all, you aren’t investing in your 401(k) anymore once you’ve retired. And you’ll likely also cut some of your commuting costs and won’t need a work wardrobe anymore.
But you’ll still need to replace the bulk of your salary. That’s because many of your expenses, such as housing and food costs, probably won’t change much. And you’ll be faced with some newer expenses, such as higher healthcare costs as you cope with the impacts of aging.
The exact amount of your pre-retirement income you’ll need to replace will be shaped by your health status and goals for retirement. Those who want to travel, for example, may need a lot more money, as will retirees who plan to relocate to a more expensive area or who need a lot of prescription drugs.
As a general rule, though, most experts recommend estimating that you’ll need a minimum of 80% to 90% of what you were earning. And Social Security cannot do that for you. Benefits are meant to replace 40% of wages — or about half or less of the amount you need.
How to supplement Social Security
If Social Security covers half of your retirement expenses or less, you’ll have to find other income sources.
You can plan to work part-time in retirement, but that won’t always be possible since jobs may not be prevalent for a senior or your health may make working them impossible.
A better option, for most people, is to put money aside in a retirement savings account. By investing in a 401(k) or IRA, you can amass a nest egg you can withdraw from each year to supplement your Social Security income. This money can fill the gap between what Social Security provides and your financial needs.
To make sure you have enough money, explore your options for setting retirement savings goals — such as assuming you’ll need a nest egg equaling 10 times your final salary. Then, start working toward amassing the required amount by setting up automatic contributions to your retirement account ASAP.
By getting a realistic idea of what Social Security can do for you, you can ensure your later years are comfortable ones because you’ll have plenty of money to meet your needs.