Social Security

How Much will Your Retirement Rely on Social Security?

“Social Security benefits are not intended to be your only source of income when you retire. On average, Social Security will replace about 40 percent of your annual pre-retirement earnings. You will need other savings, investments, pensions, or retirement accounts to live comfortably when you retire.”

This paragraph is part of the introductory message from the Commissioner of the Social Security Administration (SSA) on your Social Security Statement. Even the SSA is telling you to get your butt moving and save for retirement.

Let that sink in. Social Security will only replace 40% of your annual pre-retirement earnings.  Is that good, bad, accurate? What does that mean to you?

How do they come up with  40%?

It’s based on the average pre-retirement income of all American workers, which according to the National Academy of Social Insurance is approximately $44,000. Therefore, the amount of income replaced by Social Security is lower for those with higher incomes and higher for those with lower incomes.

Social Security Statements

Did you know the SSA now only sends statements at five-year intervals to workers who have not signed up to view their statements?  The SSA sends them to workers at ages 25, 30, 35, 40, 45, 50, 55 and 60. Go online, sign up at ssa.gov and take a gander at your annual statement to see what benefits you are entitled to at various retirement ages.

Please don’t forget to review your statements annually to keep track of your benefits and make sure there are no mistakes.

How much pre-retirement income do you need in retirement?

To know how much of retirement will be funded by Social Security you need to know how much you need! The SSA is saying they have on average 40% of your pre-retirement income covered. The biggest question of all is how much of your pre-retirement income will you need in retirement?

If you have perused any of the popular financial magazines in any given month, you may see articles recommending that you will need anywhere from 70% – 100% of your pre-retirement income during retirement. That’s a wide range. A difference of 10% has an enormous impact on your retirement.

Get to work to determine retirement needs

The first thing to do is check out the article I wrote on improving your cash flow.  Understanding your income versus your expenses, and yes, that means creating a budget, will get you in the ballpark. Analyzing your cash flow is a great start to figuring out how much you will need in retirement. 

Don’t forget there are a few expenses that you won’t have in retirement. If you have no earned income, you will no longer be paying Social Security and Medicare withholding. How much are you contributing to your retirement plan? That expense goes away in retirement as well. Combined they may be a nice chunk of change.

You may assume that expenses such as gas, clothing, and lunch will decrease when you retire.  I find that’s typically not the case. You’re not going to live like a hermit and not go anywhere in retirement. You’ll be going places, visiting family and friends, and spending time on hobbies. I call that a wash and don’t assume any decrease.

“How much you’ll spend in retirement is just as important as the amount you need to save for retirement.”

By budgeting and planning, you should have a solid grasp of your retirement needs. And don’t think this is an exercise you should do when your 60. Just like saving for retirement, the earlier you start your retirement spending plan, the better off you’ll be. So get started now. The earlier you start and the longer you keep up with your budget, the easier it will be to see how much income you’ll need in retirement.

Buckets, streams, and ingredients oh my!

I’ve heard all kinds of analogies to describe the different retirement income sources: buckets of income, income streams, income ingredients for your retirement pie. Feel free to comment below and share your favorite analogy.

It doesn’t matter what you call them, but you need to figure out how you will fund the portion of your retirement that Social Security doesn’t cover. The majority of income will come from your retirement plans.  If you’re lucky, the company you work for still offers a pension. Do you have an annuity, a brokerage account, a Roth IRA? Where you save for retirement largely depends on your situation.

All of those possible sources, or streams, or buckets, of retirement income, are put into the retirement plan. Calculations are done estimating your income needs versus the return on each investment to determine if your resources will fully fund your retirement. Again, the earlier you start this process, review it each year, and track your progress, the better off you’ll be.

Now you need to act and create a retirement savings plan within your budget.

You know what you must do;

  1. Review your social security benefit
  2. Analyze your cash flow
  3. Create a budget to determine your current and retirement needs
  4. Design a savings strategy

Taking those step will reduce both the stress as you approach retirement and your reliance on social security.

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