Will Social Security Be Enough? 4 Reasons To Focus on Private Retirement Savings
Written by
Jordan Rosenfeld
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Molly Sullivan
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Social Security is the government’s promise that you won’t be completely without income when it comes time to retire, but in today’s economy, it’s barely enough for most people to live on. The average Social Security retirement benefit was about $1,782 per month as of February 2023, which is not a whole lot of money to count on.
That’s why it’s extremely important to prepare for retirement with private retirement savings or investments, whether these come through your employer or on your own. GOBankingRates asked experts why else it’s important to focus on private retirement savings, and how to go about it. Here’s what they had to say.
Social Security Isn’t an Income Replacement
The first important thing to understand about Social Security is that it is not designed to replace all your pre-retirement income, according to Jeremy Keil, CFP(r), CFA, a retirement planning advisor.
“It’s designed to replace a certain percentage, at your full retirement age, which is 66 to 67.”
The formula, Keil said, is that Social Security takes your top 35 years of earnings, calculates their value based on inflation since the year you earned it, divides by 12 to get your average indexed monthly earnings and then applies the percentage formula to determine your promised amount that you can get at your full retirement age.
“Your first $13k per year of earnings is replaced at 90%, then your next $67k per year of earnings is replaced at 32%. Finally your earnings from $80k to $160k are replaced at only 15%.”
In other words, if you make $80,000 per year and take your Social Security at a full retirement age of 67, then you’d get 47% of your pre-retirement earnings.
“This is why it’s so important to both save for retirement on your own and make use of the full control you have when you file for Social Security.”
Social Security Can’t Account for Other Expenses
Outside of basic costs of living, there are other costs that increase as we get older, namely healthcare, said Andrew Lokenauth, a financial expert and founder of Fluent in Finance.
“Healthcare costs like Medicare premiums, co-pays and deductibles take a big chunk of Social Security income,” he said. “Prescriptions, dental care and hearing aids are not covered either.”
Additionally, the cost-of-living adjustment often doesn’t keep pace with real inflation, Lokenauth pointed out. He said that benefits can lose purchasing power over time and that up to 85% of benefits can be taxable above certain income thresholds.
We’re Living Longer
Another reality that tests Social Security is that people are living a lot longer now than their grandparents and even parents. The Hill recently reported that more people are living to age 100 than ever before. This has an impact on retirement because it means there are more years to pay for than previous generations faced.
“Retirement is lasting longer due to increased life expectancies,” Lokenauth said. “Benefits may need to cover 25 years or more after retiring.”
Private Savings Offer a Financial Buffer
Thus, relying on the meager amount Social Security provides is just not realistic. Lokenauth said that having private savings allows you to maintain your standard of living in retirement instead of having to survive on the fixed income that the monthly benefit provides. It also gives you financial flexibility for big-ticket purchases and emergency costs.
“[It] reduces risk that market downturns, health issues or other unknowns will drain your finances, and provides peace of mind knowing you have supplemental savings in addition to Social Security,” he said.
Lokenauth recommends that people contribute to 401(k) plans and IRAs consistently throughout their working years and target saving 10% to 15% of income annually minimum when possible.
Start Early and Contribute Regularly
The keys to building up the savings you need by your retirement are time and consistency, according to Sudhir Khatwani, director of The Money Mongers, Inc.
“The earlier you start, the more you can take advantage of compounding interest,” Khatwani said. “Even modest contributions can add up over time. Set a goal for your dream retirement and start stuffing as much as you can into those tax-friendly retirement accounts.”
Maximize Employer Match
If you have an employer who’ll match your contributions to a 401(k), Khatwani urges you to always contribute just enough to get the full match, because employer contributions are essentially free money added to your retirement fund.
However you go about it, don’t expect Social Security to be enough to retire on, or you may find yourself in a bad financial position at a time in your life when you’re least able or willing to work.
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