Social Security: This Is the Most Important Number To Remember

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With inflation still hot, housing prices at record levels and the cost of living increasing every year, retirement dollars don’t stretch as far as they used to.

And if your Social Security check seems inadequate for your needs, it’s because it’s designed that way.

In this article we’ll avoid the complicated details of how Social Security works and instead focus on the most important number you need to know. And we’ll use that number to help you plan a more comfortable retirement.

The Most Important Number About Social Security

Social Security was launched in 1935 to help supplement retirement for Americans after the Great Depression. It was designed to help older generations retire with dignity and to add extra income to company pensions and retirement savings most retirees received.

Today, Social Security income is much the same, functioning as a supplement to other retirement savings, but it is not meant to be your sole source of income. While Social Security can be complicated, here’s the most important fact you need to know about it:

Social Security is designed to replace about 40% of your pre-retirement income.

This might come as a shock to many people nearing retirement who don’t have a lot of savings, as retiring on Social Security alone would result in a 60% pay cut from their current earnings. This is not sustainable for most, especially since many experts recommend replacing about 80% of your income for retirement living.

What’s worse is that Social Security is also at risk of lowering benefits to retirees in the year 2035, when the Social Security fund will become insolvent and benefits would be lowered by a projected 22%. This means that recipients would receive just 78% of their total promised benefits, further reducing how much retirees can depend on Social Security.

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How This Number Affects Your Retirement Planning

If you are nearing retirement or just want to know what to expect, understanding that Social Security can replace only about 40% of your income can help you plan properly for retirement living. You will need to save and invest enough money to cover the rest of your expenses.

If you plan to live the same lifestyle with the same expenses as you did before retirement, you will need to have enough post-retirement income to cover 60% of your current expenses if you are age 67 or older (and can withdraw Social Security). If you plan on drawing Social Security at a younger age, then you might need to have even more income, as electing Social Security before full retirement age lowers your monthly benefit.

Among Americans ages 65 to 74, the average retirement savings balance is $255,000, according to the Federal Reserve’s latest numbers. That would provide only about $850 per month over 25 years of retirement. Pairing that with the average Social Security payment of $1,782 per month, the average retiree would have about $2,600 per month in income.

This means that most retirees may need to delay retiring or significantly reduce their needs to be able to afford retirement.

David Berns, financial planner at TruAdvice Wealth Management, gives a few more ideas for adjusting your retirement plans.

“Working part time in retirement is a great way to remain active and engaged with others,” Berns said. “In addition to using traditional investments, some clients will use insurance products to guarantee income. Another option is to downsize and live with family; this reduces expenses and will make their assets last longer. Lastly, one’s biggest asset is usually their home, so using a reverse mortgage or loan can be a great way to use equity for living expenses.”

Are You Retirement Ready?

What You Can Do To Better Prepare for Retirement

If you don’t have a lot saved for retirement but can’t imagine living on only 40% of your current income, you can make some changes to better prepare. Here are a few things you can do to help you afford retirement.

Understand Your Expenses

Kevin Arquette, CFP with WealthPoint Planning, said understanding your retirement expenses is the first step to preparing to retire. 

“The first step is to determine your monthly income needs in retirement,” Arquette said. “Calculate the amount you will require to maintain your desired standard of living, factoring in expenses such as housing, food, transportation, healthcare and any other anticipated costs.

“Once you have an estimate of your required income, subtract your projected Social Security income to find the deficit. This is the amount you need to cover through other means, such as personal savings, investments or additional sources of income.”

Invest in Retirement Accounts

Along with Social Security, your retirement will be funded by your retirement investment accounts. Two of the most popular accounts are a workplace retirement account such as a 401(k) and an individual retirement account (IRA). The more you invest in these accounts, the more you can save on taxes and grow your investments to help fund your retirement years.

Adjust Your Lifestyle To Save More (and Need Less)

If you don’t think you’ll have enough retirement income to fund your current lifestyle, you need to seriously consider making some adjustments. This might mean moving to a lower cost-of-living area or downsizing your home or possibly planning on fewer extracurricular activities in retirement. The great thing about minimizing your expenses is that it helps you comfortably retire with much less.

Are You Retirement Ready?

Talk With a Financial Planner

If you’re feeling lost with retirement planning and how to factor in Social Security, retirement accounts and savings, it may be a good idea to talk with a licensed financial planner. They can help you build a complete financial plan for your income and needs.

Bottom line

Social Security is designed to replace only about 40% of your pre-retirement income, which is not enough for most Americans to retire. But knowing this can help you plan to replace the remaining 60% of your income, or downsize your needs a bit to comfortably retire.

If you’re solely relying on Social Security to pay for your retirement needs, you may need to re-think your plan or meet with a financial advisor to help guide you in the right direction.

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