How the Middle Class Should Balance Private Savings and Social Security
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
The income range for the middle class is quite wide, from around $50,000 to $150,000, meaning that depending on where you fall in there, you may be better prepared than others with retirement funds.
Many people are counting a lot on Social Security to be able to stop working, but is that enough? Experts recommend private savings as well, but it can be challenging to know how much you need to retire comfortably.
Here, experts explain how the middle class should balance what they expect from Social Security with private savings.
Don’t Rely Only on Social Security
What’s most important for the middle class to consider when it comes to retirement is to not rely solely on your Social Security payments, if possible, according to Brandon Galici, CFP and founder of Galici Financial. He pointed out that the average Social Security payment is around $1,900, or nearly $23,000 yearly.
“This likely won’t be enough to cover your living expenses without supplementing through your private savings/investments,” he said.
Remember that Social Security is designed to replace a portion of an individual’s pre-retirement income, typically around 40% for many middle-class earners, according to Khwan Hathai, CFP and certified financial therapist at Epiphany Financial Therapy.
Save 10% to 30% in Private Savings
The best way to approach retirement savings is to save consistently, Galici said, and as much as you can.
“A healthy savings rate is 10% to 20%. However, if you had a late start on investing for your retirement, you may want to save over 20% if possible.”
Do the Math: Assess Your Spending
How much you need to have saved for retirement is directly influenced by your spending and expected Social Security payments.
“To best personalize this to your situation, calculate your total term ratio. This is your net worth divided by your annual spending,” said Galici.
He gave an example of a couple with a net worth of $1 million, who spends $50,000 per year, which gives them a total term of 20.
“This means that you could live on your assets for 20 years — not factoring in taxes, inflation, returns, etc. Typically, you want a ratio of around 30 to comfortably retire in your 60s.”
Find Guaranteed Income Sources
The most successful retirees will have types of guaranteed income payments such as a pension and Social Security, but you could also have money from a brokerage account or rental income.
Galici pointed out that if that same couple who spends $50,000 per year in expenses has Social Security payments of $20,000, their assets would only need to cover $30,000 in spending per year — $50,000 spending minus $20,000 in Social Security.
Use the Social Security Retirement Estimator
If you’re not sure how much you’ll need, Hathai recommended the Social Security Administration’s Retirement Estimator, which provides personalized estimates, helping individuals gauge what they can expect to receive, she explained.
“This can vary based on individual earnings history and the age at which one opts to start receiving benefits,” she said.
Wait Until Full Retirement Age To Take Social Security
While Social Security won’t pay for all of your retirement needs, if you wait until your full retirement age (66-67 for most people) or even until age 70, if possible, to claim benefits, the amount you’ll receive goes up, according to Loretta Kilday, attorney and debt spokesperson with Debt Consolidation Care.
“Every year you delay past full retirement age up to 70 boosts your benefit by 8%. For example, delaying from 67 to 70 could increase your benefit by 24%.”
Married couples can also strategize by having the higher earner delay benefits to maximize the surviving spouse’s benefit, Kilday said.
“Additionally, a lower-earning spouse may claim spousal benefits based on the higher earner’s work record.”
Replace 80% of Pre-Retirement Income
A common guideline for private savings is aiming to replace around 80% of your pre-retirement income, said True Tamplin, a CEFP and founder of Finance Strategists. While some of this may be Social Security, you want to get as close as you can to that number, yourself.
“For example, if you anticipate needing $45,000 annually in retirement, aim for savings that can provide around $36,000 per year, with the remainder supplemented by Social Security,” Tamplin said. “Middle-class households, particularly those earning between $50,000 and $74,999, are setting a strong example by saving over 10% of their incomes, and some even save more than 15%.”
For your expenses in retirement, Tamplin recommended planning to spend between 55% and 80% of your pre-retirement annual income, depending on your lifestyle, healthcare costs and income.
“If you expect an active lifestyle or have specific health conditions, adjust your savings plan accordingly. Remember, healthcare could represent about 15% of your retirement expenses annually.”
The strategy involves more than just hitting a savings target, he said, it’s about creating a plan that accounts for varying expenses, healthcare costs and lifestyle choices.
Aggressively Save in Tax-Advantaged Accounts
Saving aggressively in tax-advantaged accounts like 401(k) plans and IRAs is another smart approach, Tamplin said.
“Additionally, keeping an eye on your expected Social Security benefits can help you fine-tune your savings goals,” he said, especially if Social Security will fall short of what you need.
Also, be sure to take advantage of matching contributions that your employer offers in your 401(k) plan (Roth or pretax), Galici said.
Prepare For Change
Keep in mind that your retirement plans may change from what you envision.
“Factors such as changing economic conditions, personal health and lifestyle choices can all influence one’s retirement planning needs,” Hathai said.
Thus, she recommended engaging a financial planning expert to offer personalized advice, ensuring that one’s retirement strategy is not only comprehensive but also adaptable.
The Bottom Line
Retirement security for the middle class hinges on optimizing Social Security benefits and building robust private savings, Kilday said.
“Start saving early, save consistently, invest wisely, and create a Social Security claiming strategy. With proper planning, you can achieve the retirement lifestyle you envision.”
More From GOBankingRates
