Social Security provides a foundation for the retirement plans of millions of Americans. Unfortunately, many of those Americans incorrectly believe that Social Security's foundation is sufficient to cover their overall retirement, only to be painfully surprised when they go to collect and discover that it isn't. Don't just take my word for it. Here's what Social Security itself has to say:
Social Security was never meant to be the only source of income for people when they retire. Social Security replaces about 40 percent of an average wage earner's income after retiring, and most financial advisors say retirees will need 70 percent or more of pre-retirement earnings to live comfortably. To have a comfortable retirement, Americans need more than Social Security. They also need private pensions, savings, and investments.
What can you expect for your benefit?
Your Social Security retirement is personalized based on either your or your spouse's earnings history. As of Aug. 2016, the average retiree received $1,350.64 per month, and the average retiree's spouse received $701.76 per month. In general, a person claiming benefits on a spouse's earnings record receives up to half that spouse's benefit. For a retiree who starts to collect at his or her full retirement age, the maximum possible monthly benefit in 2016 is $2,639.
To get that maximum benefit, though, you would have needed to earn the maximum income that Social Security taxes (currently $118,500) for 35 years. For most people, benefits are closer to the typical level than the maximum level, driven by both the high earnings needed to max out benefits and the bend points that reduce the value of Social Security for higher-income earners.
As a result, if you're expecting Social Security to cover your costs of living, you'll want to keep those costs within your anticipated benefit level. On average, that'd be in the neighborhood of $1,350 per month if you're single, $2,700 per month if you're married and both spouses worked, and $2,050 per month if you're married and only one of you worked for pay.
What kind of lifestyle is that?
$1,350 per month works out to $16,200 per year, which is above the federal poverty level for a single person ($11,800). Similarly, the $24,600 per year that a married couple with one working spouse or $32,400 that a married couple with two working spouses can generally expect to get is above the Federal poverty level for a couple ($16,020). So the typical person or couple living on Social Security alone will get enough to not starve, but won't have enough for much above the bare minimums.
While that may seem reasonable on the surface -- particularly in a low-cost part of the country -- the total picture is far tougher. For instance, once one member of a couple passes away, the surviving spouse's income will drop to the higher of the two spouse's benefit. The combined Social Security benefit for a typical couple is farther above the poverty level than that of a single retiree is, and the sticker shock of losing one income can add to the stress of losing a spouse.
In addition, you can expect fairly high healthcare costs in retirement, too. The current base Medicare Part B premium is $121.80 per month per person, and a Medigap plan to help cover what Medicare won't can easily cost $250 per month or more each as well. Indeed, the typical costs for health insurance premiums for a retired couple can easily reach $250,000 throughout retirement, and that doesn't include any out-of-pocket costs of actual medical care.
On top of the medical costs of aging, there are the everyday costs of living to consider. If you own your home, even assuming your mortgage is paid off, you'll still have utilities, property taxes, maintenance, and upkeep to worry about. If you're a renter, you'll still have to pay your rent and utilities -- not to mention things like food, clothing, and transportation that you'll still have to deal with.
Plus, particularly as you get later in your retirement, you'll likely find that you'll need help taking care of some of the things that you used to be able to handle on your own. That help comes at a cost -- a cost that can be very tough to cover on a budget that consists of Social Security alone.
Build yourself a better retirement lifestyle
Fortunately, your retirement doesn't have to be limited to just your Social Security check. You can -- and should -- build a portfolio that can give you a better lifestyle than you'll get from Social Security alone. Every dollar you save up between now and your retirement is a dollar that can make your golden years all that much more golden. And if you have enough time between now and your anticipated retirement day, the growth in those dollars can be quite impressive -- potentially even making you a millionaire.
If you want a better retirement than you can get from Social Security alone, the most important resource you have is your time. The sooner you get started investing for your future, the easier and cheaper it is for you to build a nest egg that will make a real difference to the lifestyle you can expect during your retirement. So get started now and improve your chances of beating the barely above-poverty-level lifestyle offered by Social Security alone.
Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.