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What Will Your Social Security Check Buy You?

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The average Social Security check to a retiree currently sits at $1,267.55. That works out to $15,210.60 per year, or around $7.61 per hour for a full-time, 2,000-hour-per-year job. For comparison, the minimum wage in the retiree haven of Florida currently sits at $7.79 per hour.

In other words, if your vision of retirement involves living in the Sunshine State, your Social Security check may very well get you in the neighborhood of the lifestyle enjoyed by minimum-wage employees.

Or does it?
As if that weren't enough, as you age, you're likely to spend more on health-care costs. While Medicare picks up much of the bill for retirees, only Medicare Part A is covered for free, assuming you're covered by a sufficient work history. To cover some of the costs that Medicare Part A doesn't, Medicare Part B premiums start at $104.90 per month.  

For more comprehensive coverage above and beyond that, Medicare Advantage (sometimes called "Medicare Part C") premiums vary widely. That said, the typical Medicare Advantage plan that also includes decent prescription drug coverage cost around $65.78 per month in 2012, the most recent period with available information.

Put it all together, and the typical Social Security receiving retiree with decent Medicare coverage is really looking at a check closer to this:

Item

Monthly Amount

Social Security Benefit

$1,267.55

Medicare Part A

$0.00

Medicare Part B

($104.90)

Medicare Part C w/Prescription Care

($65.87)

Net Check After Medicare

$1,096.78

Data from Social Security, Medicare, and eHealthInsurance.com

That check is closer to the pre-tax earnings of someone working full time for $6.58 per hour, which is below the current Federal Minimum Wage of $7.25 per hour. And even maintaining that level of payments, of course, assumes that Social Security remains healthy -- when it's not exactly on track to remain that way for much longer.

Can you live on that?
Of course, retirees do have some advantages over their employed counterparts. For one thing, they get a tax break. They don't pay Social Security or (for the most part) Medicare taxes, and if their other income is low enough, their Social Security check is free from Federal income taxes. Plus, commuting is more optional, the dress code tends to be more relaxed, and senior discounts may well apply to several of their costs.

Also if your house is paid off, your kids grown and independent, and your idea of a happy retirement involves sitting on the porch, watching the world go by, that may well be a livable monthly check. It wouldn't earn you a spot on Lifestyles of the Rich and Famous, but with simple enough needs in a low enough cost part of the country, it might be enough to let you get by. To get a handle on about how much you'll need in addition to your Medicare-adjusted Social Security check, follow these steps:

1. Estimate your total monthly expenses at the type of lifestyle you'd like to lead when retired.

2. From that amount, subtract your estimated Social Security check after Medicare premiums.

3. Multiply the remaining amount by 12, to get a full year's picture of the costs you need to cover.

4. Multiply that full year's number by 25, to estimate the total nest egg you'll need to have.

So, in other words, if you think you'll be spending $1,000 a month above your net Social Security check, you'll need a nest egg of around $300,000 ($1,000 * 12 * 25) to get there.

Why that much?
That 25 times your annual spending number lets you invest based on what's known as the 4% rule. By investing based on that rule, you have a reasonable chance of maintaining your purchasing power (after inflation) throughout a 30 year retirement.

The authors of the study that inspired that rule presumed a balanced portfolio between stocks and bonds. So if you're looking to follow its teachings, one of the simplest ways to do so is with a couple of exchange-traded funds. Two ETFs that could get you that balanced portfolio are the stock market-tracking ETF Vanguard Total Stock Market (NYSEMKT: VTI  ) and its bond counterpart, the Vanguard Total Bond Market (NYSEMKT: BND  ) .

If that savings target seems too high, your options include either working longer (to keep the length of your retirement shorter) or investing more aggressively. For instance, the PowerShares High Yield Dividend Achievers (NYSEMKT: PEY  ) invests in higher-yielding companies with decent histories of raising their payouts. That ETF currently yields more than the Vanguard bond fund, and the companies in the PowerShares ETF have the potential to raise their payouts as they grow.

Substituting that dividend fund in place of some of the bond fund could let you get away with a smaller portfolio, if the market worked in your favor and the companies in that fund continued their dividend growth trends. But there remain no guarantees in investing, and shifts like that could also backfire if the market fails to cooperate in the future.

Start covering what Social Security won't
Still, even with no guarantees in the market, the reality is that even lousy investing beats not investing at all. All else being equal, the more you invest and the longer you continue to invest, the better your chances of building the nest egg you'll need to supplement Social Security and get you to the type of retirement you want.

Want a shot at a decent retirement in spite of Social Security's shortcomings?
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "
3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.



Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 21, 2013, at 6:20 PM, neamakri wrote:

    I was going to tell about my personal stuff, but decided to give this advice;

    (1) know that Social Security payments will be REDUCED unless the SSA is privatized.*

    (2) realizing this, PACK as much as possible into your 401(k) or personal IRA as you can. Your retirement is up to YOU, nobody else.

    *there are a number of schemes to "save" Social Security; they all involve paying retirees less. The country of Chili privatized their system 20 years ago; we just have to copy them.

  • Report this Comment On July 21, 2013, at 7:14 PM, geowb wrote:

    "The average Social Security check to a retiree currently sits at $1,267.55. That works out to $15,210.60 per year, or around $7.61 per hour for a full-time"

    ======================================

    After the minimum wage hits $10/hr you won't even be close to the above.

  • Report this Comment On July 22, 2013, at 12:00 AM, Dadw5boys wrote:

    When Interest Rates are over 6 % the Social Security Trust Fund acutally makes more money then it pays out each year from the U.S. Treasury Bonds it buys with your Payment into the system.

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Chuck Saletta
TMFBigFrog

Chuck Saletta has been a regular Fool contributor since 2004. His investing style has been inspired by Benjamin Graham's Value Investing strategy. Chuck also can be found on the "Inside Value" discussion boards as a Home Fool.

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