This fall, the Social Security Administration announced that roughly 70 million Americans will see a 5.9% bump in their Social Security payments in 2022. This increase is the highest cost-of-living adjustment in nearly 40 years.
Unfortunately, the raise is due to the high inflation that Americans are seeing across the economy on things like healthcare, food, living expenses, and more. Social Security benefits are much more sparse than many realize, so here is what people need to know about being financially secure in retirement.
Social Security doesn't go very far
The idea that Social Security benefits can fund your retirement is a very misleading impression that many U.S. citizens have. The average monthly payment is approximately $1,543, totaling an annual income of $18,516 per year.
Image source: Getty Images.
The U.S. poverty line is $12,880, which is unrealistic to live on. The average rent in the United States is $1,124 per month, which alone would consume more than 70% of your Social Security payment if you rented instead of owning a home outright.
The average car payment in the United States is nearly $400 per month for used cars. Even if you are reasonably thrifty, it's tough to get by on Social Security. There are endless examples of how SSI payments fall short of real-world costs of living. A 2016 study showed that women spend up to 70% of their retirement on healthcare alone!
Sadly, an increasing number of retirees are leaning on Social Security as pension plans are steadily being phased out of corporate benefits. The 5.9% increase that retirees will see is good news, but with inflation hitting more than 6% as measured by the Consumer Price Index in the months since the 2022 increase was finalized, retirees are still losing purchasing power.
U.S. Inflation Rate data by YCharts
Social Security has met an unfortunate challenge of facing costs that have risen faster than the tax revenue that funds the program. The 2021 Social Security Trustees Annual Report projects that reserves could be depleted by 2034, a figure estimated before the pandemic, when businesses closed and unemployment soared (meaning less tax revenue).
The government has multiple options to help the program, like raising the age to claim benefits, increasing taxes, etc., so I don't want to incite panic about the idea of Social Security going bankrupt. The government likely wouldn't let it happen because so many people rely on it.
Build income streams to retire securely
However, it's essential to take your financial future into your own hands. Whether you are young, nearing retirement, or already a retiree, most people can take some action to begin building income streams to reduce their dependence on Social Security.
If you are already drawing Social Security, you can still generate an income and receive all of your benefits if you are full retirement age. If you are younger, you can draw Social Security, but your earnings may impact your payments if they're above a certain level:
Source: Social Security Administration.
If you are too young for Social Security, you still have time to maximize your earnings and continue saving for retirement. There are several tools available to help you build wealth, including
- 401(k)s, or other employer-sponsored accounts.
- Individual retirement plans, both traditional or Roth.
- Taxable brokerage accounts.
You can build wealth by investing in exchange-traded funds (ETFs), designed to mimic the S&P 500 (or the broader market), which historically averages about 10% returns per year. Some examples include funds like the Vanguard S&P 500 ETF (VOO +0.35%) or Vanguard Total Stock Market ETF.
If you invest in dividend stocks or funds that pay dividends, you can live off of the dividend income they create without ever having to sell your shares. Some companies raise their dividend every year, and those that do so for 25 years or more are called Dividend Aristocrats. The Vanguard Dividend Appreciation ETF (VIG 0.03%) offers a dividend yield of 1.5%, while the iShares Core High Dividend ETF (HDV +0.67%) yields 3.5%.
Don't rely entirely on Social Security
The best way to secure a comfortable and healthy retirement is to start saving and investing your money as soon as possible. Social Security isn't the safety net that the name implies, and the 5.9% increase for 2022 might grab headlines, but inflation eats away at the benefit of the raise.
Make sure to build a diversified portfolio of investments that suit your risk tolerance, time horizon, and investment goals so that you can make sure your golden years are truly enjoyable.
