Social Security is the nation's taxpayer-funded retirement system, and everyone pays into the plan from their first day on the job. Many Americans have no personal retirement savings, and they intend to live on their Social Security benefits — and little else — when they stop working.
If you are among these folks, retiring on Social Security might be more difficult than you think. Social Security payments are relatively small and might not even cover the basics, let alone emergency expenses. That's why experts recommend you use the benefits to enhance — not finance — your golden-years lifestyle. So before you get to retirement, prepare yourself with these Social Security facts.
Social Security Retirement Benefits Aren’t Enough to Sustain You
Social Security retirement benefits make no claim of providing you with a lavish lifestyle. The average monthly benefit for all retired workers in 2017 will be $1,360, according to the Social Security Administration. Although it might look possible to squeak by on that amount, real life has a way of being more expensive than you expect.
If your monthly check is $1,360, your annual income will be $16,320 per year. Such an income is above the federal poverty level for a single person, but it's still not much. To survive on that income, you'll need to find low rent and set yourself a strict grocery budget — and that's before considering utilities, transportation and healthcare costs. Carefully think through the various expenses you consider necessities, and try to slot them into your retirement budget.
Once you've budgeted for necessities, list out possible emergency situations you might encounter: a dead car battery, a dog with a foxtail in its ear, or spilled coffee on your computer keyboard. The bare-bones retirement check just won't spread that far.
Even the Social Security Administration counsels people not to try to retire on their benefit checks alone. "Social Security replaces about 40 percent of an average wage earner's income after retiring, and most financial advisors say retirees will need 70 percent or more of pre-retirement earnings to live comfortably," SSA said on its website. You'll do far better if you supplement Social Security benefits with pensions, savings and investments.
Social Security Benefits Might Not Cover Rising Living Expenses
There are many unsettling truths about Social Security. Among them is the fact that as expenses go up, the increased cost of living eats into what your benefits can buy.
Don't assume that when costs like healthcare rise, your Social Security benefits also increase. The annual cost-of-living adjustment — known as the COLA — doesn't reflect the actual cost increases you are obligated to pay. Over the past eight years, the COLA was 0 percent three times. Only once did it rise by more than 1.7 percent.
The 2017 COLA increase was only 0.3 percent, which leaves the average retiree with just about $5 more a month, while a retired couple got a $6 increase.
The COLA is based on inflation. SSA uses an inflation measure called the Consumer Price Index for Urban Wage Earners and Clerical Workers, or the CPI-W. To get the next year's COLA, the agency averages out the monthly CPI-W figures for July, August and September, and compares that average with the same period for the prior year.
Some claim that this method doesn't incorporate costs that hit retirees the hardest, like out-of-pocket healthcare costs. They have proposed a modification of the COLA method, but it hasn't happened yet.
Healthcare Changes Could Bite Into Your Social Security Check
Medicare is a national health insurance program that started in 1966. Seniors who pay into the system are eligible for Medicare when they turn 65.
Medicare covers only part of healthcare expenses for those enrolled. Recipients are responsible for the rest of their healthcare costs. These costs vary depending on what kind of care a person requires. Premiums for Part A and Part B coverage are rising in 2017, as are costs for Part D prescription drug coverage. These cost increases can be difficult for retirees who live on nothing more than Social Security.
Some Republicans have expressed concerns about the growing costs of Medicare and want to move away from the current "fee for service" Medicare model. They would like recipients to use private health plans, to which the government would contribute only a fixed amount. Recipients would have to pay the balance, which could be difficult for those retiring on Social Security.
For his part, President Trump repeatedly has pledged to leave Medicare alone — a promise he reiterated in his recent speech to Congress.
Social Security Taxes Can Eat Up Your Benefit Amount
It's easy to get things wrong about Social Security. Some people are already retired before they figure out that Social Security benefits are not always tax-free. Taxes can be one of the costs of retiring on Social Security benefits.
Uncle Sam pays out your Social Security benefits, but he might want a share, depending on how much you earn. To determine whether any of your benefits are taxable, compare the base amount for your filing status with the total of one-half of your benefit added to all your other income except tax-exempt interest.
Base amounts are:
- $25,000 if you're single, head of household, or qualifying widow(er)
- $25,000 if you're married filing separately and lived apart from your spouse for the entire year
- $32,000 if you're married filing jointly
- $0 if you're married filing separately and lived with your spouse at any time during 2016
Don't forget that "other income" doesn't necessarily mean a job. Under the IRS code, your income can include things such as:
- Investment dividends
- Scholarship and fellowship grants
- Bartering income
- Debt forgiveness
And if you decide to retire abroad in order to get more bang for the buck with your benefit amount, check out the foreign tax rules. Some foreign countries tax the Social Security benefits of expatriate Americans differently than the U.S. does.
Social Security Changes Could Affect Your Financial Security
When you decide to retire on Social Security benefits alone, you are betting that the program will stay essentially the same through your retirement. How likely that is depends on how many years you have left before retirement. It also depends on the political climate.
As with Medicare, Trump has sworn he will leave the Social Security system as it is. But other Republicans disagree. Mick Mulvaney, the new director of the Office of Management and Budget, has advocated cutting Social Security's annual budget and raising the full retirement age to 70.
Given the great uncertainty, it pays to keep up with legislative proposals. If you know what is coming, you can prepare and plan for changes to Social Security.
Don’t Rely on Social Security Alone
Brannon T. Lambert, wealth manager at Canvasback Wealth Management in Raleigh, N.C., said that planning for retirement is difficult enough when there are a variety of income sources available. But you must be careful if you intend to use Social Security benefits as your lone source of retirement income.
Lambert suggested doing your own research rather than relying on neighbors, friends or family when you are forging a retirement strategy. Also, do not accept the advice of employees of the Social Security Administration. Although you might expect an SSA agent to be knowledgeable, that is not always the case.
Accepting an incorrect assessment of whether you're eligible for a benefit can cost you tens of thousands of dollars in benefits in the future. It is far better to take the time to study and understand your options.