Social Security was never designed to provide retirees with their only source of income. Even so, a new GOBankingRates survey of more than 1,000 adults found that if not for Social Security, nearly one in four people wouldn’t have any retirement at all.
While nearly as many people could leave their benefits on the table and still retire in style, 50% of the population will need their monthly check to cover more than half or even all their expenses after they stop working.
Here’s what it means.
The study found that just over 23% of people plan to rely solely on Social Security for their retirement income. Another 28% expect their benefits to cover more than half of their spending.
On the more comfortable side of the equation, an additional 28% say the program will account for less than half of their retirement income. The 1-in-5 who are sitting prettiest won’t rely on Social Security at all.
The Social Security Administration (SSA) reports that benefits account for a healthy 30% of recipient income overall. But 37% of men and 42% of women count on their monthly checks for half their income or more, representing a dangerous overreliance on benefits.
That range is significantly higher than the 28% of the study’s respondents who expect to use Social Security for at least 50% of their spending, which means many people are probably overoptimistic about their prospects.
Among the most vulnerable population with the direst outlook, the SSA says 12% of men and 15% of women count on Social Security for 90% of their income or more. Considering a much higher 23% of the study’s respondents expect to depend solely on Social Security for retirement income, it’s likely that at least some of them aren’t optimistic enough.
The SSA says the average Social Security beneficiary receives a $1,837 monthly check.
If you feel like that’s too little to live on, that’s the whole point.
“Social Security was designed as a safety net and never meant to cover all your post-work-life expenses,” said Entrepreneur and Personal Finance Expert Tim Schmidt, vice president of business development at Cayman Financial Review. “I remember advising a client who planned to rely solely on Social Security for retirement. After a thorough review, it became clear that the numbers simply wouldn’t add up for a comfortable life. Ideally, Social Security should form just one piece of a diversified retirement puzzle.”
So, if benefits are not designed to fund your entire retirement or even half, what is the right percentage?
“Think of it as an essential yet limited income stream covering 30%-40% of your pre-retirement income,” said Schmidt. “For the rest, you’d be wise to look at investments, savings, or even part-time employment.”
If $1,837 isn’t 40% of your current income, don’t worry — Social Security isn’t supposed to replace two-fifths of your full pre-retirement earnings.
According to the SSA, “It is commonly accepted that a replacement rate of roughly 70% is adequate for retirement income from all sources, and Social Security benefits typically account for a replacement rate of roughly 40%.”
So, your benefits are designed to replace 40% of 70% of your pre-retirement income, which stretches $1,837 a whole lot farther — but what, exactly, counts as pre-retirement income?
The SSA continues, “The 70% replacement rate recommended by many financial advisors is generally measured relative to earnings immediately preceding retirement, but Social Security replacement rates are measured relative to a wage-indexed average of lifetime earnings.”
The SSA advises that it’s risky to “draw conclusions based on replacement rates calculated using different denominators.”
For the sake of consistency, the agency offers four ways to measure pre-retirement earnings, so you’ll be more precise in estimating how much of those earnings Social Security should replace:
- Final earnings: This is the average of real earnings over the five years before you claim Social Security benefits — that’s typically less than you made during your peak earning years earlier in your career.
- Present value (PV) payment: This represents a constant real payment over all your working years derived from the present value of your lifetime earnings.
- Wage-indexed average earnings: This takes the average of all your earnings before you claim Social Security benefits. This SSA uses a similar method to calculate your Social Security benefits.
- Real average earnings (consumer price index (CPI) average): This takes inflation into account and adjusts the average of all earnings prior to claiming Social Security benefits accordingly.
No matter how you calculate the portion of pre-retirement income that Social Security will cover, you should start by accepting that your benefits can’t comfortably replace half your earnings — and certainly not all of them.
However, wise retirees focus as much on the variety of income streams as they do on the total dollar amount they receive every month.
“Social Security should definitely not be the lone wolf when it comes to funding one’s retirement,” said Dennis Shirshikov, professor of finance, economics, and accounting at the City University of New York and the head of growth at Awning, a site that helps people support their retirement through real estate investing. “Ideally, it should act as a supplementary cushion rather than the main seat. Think of Social Security as the backup singer to your retirement income’s lead vocalist.”
Shirshikov advises against accepting the standard of Social Security replacing two-fifths of your earnings. He thinks 40% should be the outside limit, and that Social Security accounts for as little as 20% for those with the healthiest blends of retirement income.
“This gives room for other streams like 401(k)s, IRAs, or even some unconventional routes like real estate investments, which is the sector I work in,” he said. “I remember talking to a retiree who combined rental income from properties he invested in with his Social Security benefits. He had peace of mind knowing that if one stream dried up, the other was still there.”
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