Does Social Security Provide Enough Money for Retirement?

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Posted on: 06/10/2020
Does Social Security Provide Enough Money for Retirement?

Your 66th birthday is a cause for celebration. Not just because you’ve lived a long life, but due to the fact that it’s the full retirement age for the generation of baby boomers born between 1946-1964. It’s when you can hang up your hardhat and finally begin to enjoy your retirement, which includes those well-earned Social Security benefits. Speaking of, when you retire, will Social Security be enough to support you in your relaxing twilight years?

It’s the question everyone approaching retirement asks and worries about. In 2019, the average Social Security benefit for someone who retires at the age of 66 was $1,461 per month, totaling to $17,532 a year. It’s a nice chunk of change, but what about your bills, insurance premiums, your outstanding loans, and other expenses? 

How It Works

It’s essential to understand the basic concept of how Social Security works so you can decide if it’ll end up being enough money to pay your retirement expenses. You don’t have to receive your Social Security at 66, in fact, the earliest you can opt to receive your benefit is the age of 62. However, it does alter some things.

If you choose to start receiving your Social Security at 62, they’ll be comparatively smaller than if you decide to receive them at the age of 70. Almost half of Americans claim their Social Security benefits at this earliest possible age, although the numbers are beginning to show a decline, per the studies conducted by the Center for Retirement Research at Boston College. In 2005, 60% of women and 55% of men signed up for their Social Security at the earliest age, 62, but by 2017, only 33% of women and 29% of men claimed their benefits at 62.

Alternatively, if you wait until you’re 70 for your Social Security, you could increase your benefit by 32%. Your $1,000 monthly Social Security payment you would’ve received at 62 becomes $1,320 when you choose to claim it at 72.

Social Security is unique for each person, calculated based on your 35 highest-earning working years. If your highest-earning working years happen to be in your 60s and you continue to earn close to retirement, this will boost what you’ll get for your Social Security. Even if you are a high wage earner, there are benefit caps. What you receive from Social Security won’t surpass a certain dollar amount each year, no matter how much you earned.

To qualify for Social Security, you need to have earned work credits. Work credits are awarded for the years you’ve worked (each year you can earn a maximum of four work credits), and you also need to pay Social Security taxes.

Is It Enough?

According to the Social Security Administration, this benefit is only intended to compensate for 40% of the average earner’s income when they retire. Social Security isn’t designed to cover your future costs or even support your current lifestyle.

There’s also the COLA, the cost-of-living-adjustment. Even with retirement just on the horizon, you know that the cost of living changes from year-to-year. However, the COLA doesn’t always occur, and in 2015, 2010 and 2019, there weren’t any increases done in Social Security retirement benefits.

This is because COLA is based on the percentage increase in the U.S. Consumer Price Index. Even with a COLA increase, you still have to consider that your Social Security benefit only covers 40% of your income. Also, if this benefit has made an increase, what you save for the additional expenses in your retirement should be adjusted accordingly, too.

Long story short, Social Security isn’t enough to retire on. It’s not meant to be. Your job is to take advantage of retirement accounts available to you while you’re young, like through your company’s matching contributions, letting this money grow over time.

How Much Do You Need?

The general consensus is that retirees should have 70-80% of their pre-retirement income replaced in order to live comfortably. 70% is a good starting point for a standard because your expenses will be lower. You won’t be commuting, and you won’t be shuttling away 10-15% for retirement anymore. Of course, everyone is different, and when you retire, your needs will change. That’s why it’s important to determine well ahead of time how much you’ll need for the things you want to do in retirement and the kind of lifestyle you want to have.

Consider a few guidelines:

  1. Don’t count on Social Security when calculating how much you need to save for retirement. 

  2. Instead, focus on using your retirement accounts and treat any additional benefits or pensions as just that - a benefit.

  3. What expenses will carry into your retirement? Loan payments (car loans, mortgages, secured and unsecured loans, short- and long-term loans), insurance expenses (car, home, life, long-term care, health insurance), your utilities, and regular bills that will remain unchanged regardless of your employment. You might not know the exact figures, but you can estimate if you’re still far off from retiring.

  4. Your retirement lifestyle. Some people know early on what they want to do when they retire like traveling, cruises or moving elsewhere, taking up hobbies or joining a country club. You can plan for these expenses, or if you’re still young and unsure, set aside money for what you think you might want because you can always use it differently.

Keep in mind that by the time you retire, you may not have things like student loans or a mortgage, which would be great news, but instead your expenses will change. Health insurance and life insurance will likely become more expensive as you’re older and a greater risk to insure. While things like utilities will remain unchanged, prescriptions and medical bills will be pricier.

Retirement Accounts

New to the idea of retirement? Don’t worry. What you need to know is that yes, there’s Social Security, but don’t calculate this as part of what you’ll be receiving in your retirement. It’s better to count on what you can save now through your retirement accounts.

There are a few different retirement accounts you can take advantage of and you need to check to see if your employer offers a sponsored retirement plan through your company. It’s an easy way to get free money for your retirement account.  A 401(k) is an example of this where your employer will match a portion of your contribution. There are also IRAs: traditional and Roth. The younger you are when you begin to save for your retirement, the better off you’ll be when it comes to saving for it.

When in Doubt

Unsure about your retirement planning? Have questions on your Social Security benefits? There’s no better solution than to discuss your finances with a financial advisor. While there are plenty of great online resources that can help you plan for retirement through the many different types of retirement accounts, a financial advisor will have your personal numbers to work the math.

The final word on Social Security is that while it’s a much-deserved perk for hard-working Americans, it shouldn’t be relied on for all of your income when you retire. It’s a benefit, and your retirement accounts that you’ve saved into for your working life will be the main supplement when you retire instead.

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