24.6 Million Seniors Live on Social Security Alone, About $25,000 a Year. Here’s How Not to Join Them
Millions of retirees are discovering too late that Social Security covers far less than they expected, leaving them trapped on a fixed income that barely pays the bills. The window to avoid that fate is smaller than most workers realize.
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Workers are often advised not to retire on Social Security alone. The reason? If you earn an average paycheck, Social Security will only replace about 40% of it.
Retirees typically need somewhere in the ballpark of 70% to 80% of their former income to live comfortably. So having other income streams to supplement Social Security is key.
Unfortunately, data from the nonpartisan Senior Citizens League reveals that many retirees are extremely reliant on Social Security. An estimated 24.6% seniors have only those monthly benefits for income.
Worse yet, the average monthly retirement benefit today is about $2,086 per month. On an annual basis, that’s a $25,000 income, which may not even be enough to cover basic expenses.
And of course there’s the potential for Social Security cuts to worry about. The program’s Trustees recently projected that Social Security’s trust fund could be depleted by late 2032. Without reforms, benefits could be reduced by about 22% across the board.
That’s why it’s important not to retire on Social Security. And if you want to avoid that fate, there’s one simple thing you need to do.
Prioritize retirement savings from the start
If you don’t want to have constant financial pressure in retirement, you should plan to have income outside of Social Security. And a good way to set yourself up with a comfortable lifestyle is make retirement savings a priority early on in your career.
If you get into the habit of contributing to an account like an IRA or 401(k) and invest your money wisely, you may be able to grow a significant amount of wealth over time. Better yet, you may be able to do that without parting with a significant amount of your pay.
Let’s say you begin saving for retirement at age 25. If you contribute $350 monthly to an IRA or 401(k), by age 65, you might have close to $1.1 million if your portfolio delivers an average annual 8% return, which is a bit below the stock market’s average.
But if you wait to start funding your savings, you’ll need to contribute a lot more money on a monthly basis to build a nest egg that large. If you start saving at 40, for example, and retire at 65, that’s a 25-year window. At that point, if you want a nest egg of just over $1 million, you’ll need to contribute about $1,200 per month, assuming the same 8% return as above.
Contributions that large may be doable if your salary is high. Otherwise, they may be restrictive or not even feasible.
Plus, in your 40s, you may find yourself grappling with college costs if you have kids. So you can’t assume ramping up on retirement savings will be easy or doable.
Make sure your financial plans are grounded in reality
Part of the reason some people may neglect retirement savings is that they expect Social Security to replace their paychecks in full. In the course of your planning, make sure you understand the role Social Security is designed to play in your retirement finances, and that you’re not overestimating your benefits.
Finally, realize that if you have a workplace retirement plan, the contributions you make may not all have to come out of your own paycheck. Many companies offer a 401(k) match that allows you to add to your savings more easily. The key is to capture all of the matching dollars you’re entitled to from the start to make the path to building retirement wealth more seamless.
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Maurie Backman has more than a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate. Her work has appeared on sites that include The Motley Fool, USA Today, U.S. News & World Report, and Kiplinger.
Prior to becoming a full-time financial writer, Maurie worked in the financial industry trading distressed debt. She then changed course and spent a few years designing electronic toys. After a stint in content marketing and UX, she shifted back into writing and has since covered everything from the housing market to estate planning to Medicare.
When she's not busy writing, Maurie can be found hiking, walking her dogs, driving her kids to their various sports practices and games, and curling up with a good book. She cooks on occasion and bakes way too often.
