For many years, Social Security has served as a key source of income for tens of thousands of retired Americans. In fact, nowadays, an estimated 61 percent of couples rely on their benefits to provide at least half of their income. The problem, however, is that Social Security was never designed to pay seniors’ living costs in their entirety. So when we ask if the average American can live off Social Security alone, the solution is an emphatic no.
Social Security’s limitations
Though Social Security is instrumental in assisting countless retirees to stay afloat financially, it was never supposed to be a sole source of revenue for seniors. The Social Security Administration itself says that those benefits will, at best, replace roughly 40 percent of the normal worker’s pre-retirement earnings, but as we’ll see in a moment, that won’t allow the average retiree to totally pay his or her bills.
What’s more, Social Security is now facing a substantial shortfall. And while there is a chance Congress will step in between now and then using a fix, it’s not something present and future retirees can bank on. This indicates is that there could very well come a stage when Social Security can’t even replace 40 percent of recipients’ pre-retirement income.
While the amount of money you’re going to need in retirement will depend heavily on your lifestyle and goals, many seniors will need around 80 percent of their former income to pay for the fundamentals.
But don’t just take my word for it. Instead, let us look at some numbers. The average Social Security recipient currently receives about $1,360 per month, or $16,320 a calendar year, in benefits. A dual-income home, therefore, might collect $32,640, on average.
Now let’s see how that figure stacks up against the costs swimmers inevitably confront, such as the following:
Healthcare. The average healthy 65-year-old couple now can expect to invest $377,000 on health care in retirement.
Housing. An estimated 30% of seniors 65 and over continue to carry mortgage debt. But even if your home is repaid in time for retirement, then you’ll still be looking at maintenance expenses, which may readily come to 4% of your home’s value each year. As a result, the average American household currently spends $15,528 a year on home.
Transportation. Just because you’re no longer commuting to work does not mean that you do not need to have around town. Transportation costs retirees an average of $6,852 per year.
Food. The typical senior household spends $5,508 annually on food. Now, this figure does include $170 a month on restaurants, but even if we substitute that spending with home cooking, we’re still looking at roughly $4,140 annually for sustenance.
Clothing. Though you might not need much in the manner of professional apparel and business suits, you can still expect to spend some money at your local department store once you retire. In fact, the average senior family spends $1,417 annually on clothes.
So let’s add these up bare-bones expenses. Even when we shave off a little on the food class into account for fewer restaurant meals, we’re still considering a minimum of $46,787 only to get by. And that figure includes zero leisure spending, nor does this include expenses such as cable and cell phone service. Since we just learned that the typical dual-income household can anticipate $32,640 out of Social Security in a best-case situation, it makes a fairly clear case that the average American cannot live off those gains alone. Period.
Start saving now
The Economic Policy Institute reports that 41% of baby boomers aged 55 to 64 have no retirement savings in any way. If you are part of the statistics, then you will want to start taking steps to ramp up your retirement plan gifts while possible.
Employees under 50 can now put up to $5,500 annually to an IRA and $18,000 a year into a 401(k). If you’re 50 or older, these limits increase to $6,500 and $24,000, respectively. Even in the event that you can’t max out your contributions, putting some money aside is better than nothing. In reality, if you invest wisely, you may be shocked at just how large a nest egg you amass.
Case in point: Contributing $300 a month into a retirement plan over a 30-year period will provide you a rather impressive $340,000 nest egg, assuming your investments produce an average annual return of 7% throughout that time.
No matter how much cash you’re ready to save on your own, make the obvious mistake of saving nothing.