Retiring on Social Security Alone? Here’s the Pay Cut You Might Be Looking At

Back in the day, it was common for people to stick with the same employer for 30 or 40 years and retire with a pension. These days, it’s mostly public employees who get pensions. Private sector workers are commonly tasked with saving for retirement on their own. And many don’t rise to the challenge — often due to financial constraints.

It’s for this reason that a good number of older Americans end up having to retire on only Social Security. But if you end up in that boat, you should know that you could be looking at a pretty serious pay cut.

Can you live on just 40% of your former earnings?

If you’re an average wage-earner, you can expect Social Security to replace about 40% of your pre-retirement income. But that means that if you retire on just Social Security, you’re looking at about a 60% pay cut.

Now it’s true that many people see their spending decline in retirement. But as a general rule, seniors are advised to try to replace at least 70% of their previous income to maintain a comfortable lifestyle.

If you only have Social Security to live on in retirement, you might need to make serious cuts to your budget. And that could mean constantly being worried about money and not having any leeway to spend on leisure or entertainment, which are important things when you’re not filling your days going into an office.

Remember, even though some of your living costs might shrink once you stop working, many of your basic expenses will remain intact. You’ll still need to pay property taxes and insurance on your home, and if anything, your maintenance costs might rise as your home ages. Also, while you might spend less on gas and tolls due to not having a daily commute, if you still need a car where you live, you’re looking at insurance and maintenance costs there, too.

Plus, some of your expenses might actually increase in retirement. You could end up spending more on healthcare if your out-of-pocket costs are higher on Medicare. And you might spend more on utilities due to being in the house more often. So when you really think about it, living on just 40% of your income may not be doable.

Aim to build savings, or have another plan

It’s not a great idea to retire on just Social Security. So rather than do that, try your best to build savings. Even if you’re only able to contribute a few hundred dollars a month to a retirement plan, it could go a long way over time.

If you don’t think saving for retirement is in the cards, you’re not necessarily doomed. But in that case, you may want to plan on working part-time as a retiree. And you may find that you’re able to get by just fine with that setup.  

The key is to have some income to supplement your Social Security, though. That way, you won’t be forced to grapple with the effects of a drastic pay cut.

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