If You Count Social Security as ‘Savings,’ How Much Do You Really Need To Retire?
Written by
Jennifer Taylor
Edited by
Molly Sullivan
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You’re working hard to save for your golden years. However, you’re not sure how much money to put aside.
Standard advice is all over the place. Some experts say you need around $1 million, some suggest around 10 times your annual salary and others recommend saving enough to cover 80% of your pre-retirement income.
No wonder you’re confused.
As of July 2023, the average Social Security benefit is $1,703.98 per month — but that’s just an average. To make it even more complicated, your benefit could be much more or less.
Keep reading to find out how to approach retirement when considering Social Security as part of it.
How To Think About Social Security
Justin Pritchard, CFP, founder of Approach Financial, Inc., noted that Social Security will likely be an important part of your retirement income.
“While it’s tempting to say ‘I’m not going to count on it,’ doing so significantly raises the hurdle for retiring,” he said. “The reality is that Social Security will probably be there for most people, although it will likely get less generous over time.”
No matter what the size of your Social Security benefit, it will decrease the amount of savings you’ll need to have.
“You can effectively reduce the amount you need to withdraw from assets by the amount you get from Social Security,” he said. “So, if you want to spend $6,000 per month and you get $2,500 from Social Security, you only need assets that support $3,500 [per] month of withdrawals.”
From there, he said conventional wisdom would have you multiply the amount you need each year by 25.
“So, $3,500 [per] month is $42,000 per year,” he said. “Multiply that by 25 for a rough estimate of $1,050,000 in today’s dollars needed at retirement.”
However, he warned it’s not that cut and dry.
“It’s critical to understand that this is an oversimplification and it may give you bad information,” he said. “Your retirement is too important to leave to a rule of thumb or oversimplified guidelines and you might need more or less than that.”
Do note, all of the above may need to be adjusted for inflation, he said.
“The best way to figure out how much you need is to crunch some numbers with a calculator or software,” he said. “That’s especially important when Social Security is part of the picture.”
In this case, he said there are several factors to consider.
“You’d want to look at all of your income sources, the timing of when income begins and the level of assets that can reasonably support that spending,” he said. “Online calculators and financial planners can help you get a decent idea of how much money you need.”
He said people often assume you’ll start using your Social Security benefits immediately after you retire, but that isn’t always the case. In fact, he said it often makes sense to delay claiming your benefits after you stop working.
“Delaying not only allows you to get more each month, but it enables tax planning strategies,” he said. For example, if you want to reduce the impact of large RMDs [required minimum distributions] later, you might want to spend down some of your pre-tax savings or do Roth conversions.”
He said these strategies are most effective before starting your Social Security benefits.
“You’ll probably have less taxable income and withdrawals might give you all the cash flow you need during that ‘bridge’ period,” he said.
Speaking of taxes, you’ll want to minimize the amount of your retirement income that goes to Uncle Sam.
Dave Zaegel, CPA, CFP, co-founder and president of CWOs for Hire, noted that Social Security is not taxed and couples ages 65 and up, filing jointly, aren’t taxed on income below $27,300 per year –$14,700 for those filing single.
Structuring Your Retirement Savings
When it comes to making sure you can safely get the amount of money you need from your retirement assets, Zaegel said there are two key factors.
“First, they should structure the investment accounts so that the next five years of income are in cash or bonds,” he said. “That way, they don’t have to worry about the movements of the stock market and can take income as needed.”
He said anything you need beyond five years’ time should remain invested for growth.
“That growth is important for helping them get the most money out of their accounts in retirement,” he said.
3 Tips To Step Up Your Retirement Savings
If you feel like your retirement savings isn’t where it should be, don’t panic. Here are three tips from Pritchard to get back on track.
Set Up an Individual 401(k)
“If you have any self-employment income, consider setting up an individual 401(k),” he said. “You can save a substantial amount and you can often choose from pre-tax, Roth or a combination of contribution types.”
Save a Higher Percentage of Your Paycheck
Contact your employer and request to have more of your pay directed to your retirement plan.
Get in touch with your employer’s HR department and request to have a higher percentage of your pay directed to your retirement plan, he said.
“If you can only afford an extra 1% or so, that’s better than nothing,” he said. “Doing this periodically can make a difference over the long run.”
Take Advantage of Health Savings Accounts
“Don’t ignore HSAs, which can be triple-tax exempt if you meet all IRS requirements,” he said. “Unlike IRA contributions, HSAs can offer a deduction for contributions regardless of your income,” he said.
Retirement Savings by State
Saving for retirement is essential, no matter what state you live in. However, you’ll need more to live comfortably in some states than others.
For example, the average cost of living after using Social Security income in Mississippi is $20,213.83 per year, according to a GOBankingRates study. In total, you’ll need $505,346 in savings to retire in the state (depending on your situation).
On the other hand, if you plan to retire in New York, you’ll need to save nearly $1.3 million (depending on your situation. The average cost of living after using Social Security income is $51,093 per year.
Regardless of where you’re at in your retirement savings journey, it’s never too late to reach your goal. Careful planning and strict diligence toward saving can help you put aside enough money to relax and enjoy your golden years.
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