As of January 2017, the average retiree receives $1,360 per month from Social Security, and the average retired couple gets $2,260 each month. That works out to an average annual benefit payment of $16,320 for an individual or $27,120 for a couple.
That means Social Security provides enough to keep a typical person or a couple above the federal poverty level. Even with that, benefit levels are well below the overall average household income for families of that -- or any -- size, which means that the lifestyle Social Security offers is a fairly basic one.
Risks in the Social Security lifestyle
While Social Security's benefit payments are guaranteed (at least until the Trust Funds empty or Congress changes the law), individual benefit levels only increase in line with inflation. That means that if you're relying on Social Security to cover your costs of living, your lifestyle will at best remain constant. As you age, you may find you need to spend more of your income on medical care and on taking care of things you used to be able to do for yourself -- leaving you with less to cover everything else.
In addition, once one member of a retired couple passes, so does a significant portion of that household's Social Security benefit. A surviving spouse generally receives the higher of his or her own benefit or that of his or her deceased spouse but not both payments. So when one spouse passes, a household's Social Security income can instantly drop by somewhere in the neighborhood of 40%.
As if that weren't enough to worry about, Social Security's Trust Funds are on track to run out of money in 2034 -- just 17 short years from now. If nothing is done to shore up the program in the interim, benefits will need to be immediately slashed by around 21%, with the cuts increasing to 26% over time. That's soon enough that even many current Social Security recipients are at risk of seeing their benefits cut. The chart below shows the details:
What you can do about it
Social Security may provide the foundation for the retirement plans of millions of Americans, but like any foundation, it needs a strong structure around it for it to really do its job well. Social Security was never intended to be a retiree's sole source of income, but it was instead designed to be part of a package that also includes retirement savings and pensions. Pensions may be fading away, but you can still save for your own retirement -- and your boss might even be willing to kick in a bit to help, too.
If you're under age 50 and working (or married to someone who is and file your taxes jointly), you can contribute up to $5,500 to an IRA. Once you reach 50, your limit increases to $6,500. If your employer offers a 401(k) or similar plan, you can contribute up to $18,000 if you're under age 50 or up to $24,000 at age 50 or up. And, of course, there are no limits to what you can save or invest in a standard brokerage account that you simply label as being part of your retirement plan.
If you're planning on a retirement that lasts around 30 years, a reasonable target is to have saved up around 25 times the annual expenses you need your portfolio to cover by the time you retire. So if you expect to need $40,000 per year to cover your retirement costs and that Social Security will cover $15,000 of that amount, your portfolio would need to cover $25,000 per year. Twenty-five times that amount is $625,000, which becomes your retirement nest egg target.
The reason you'll want to target 25 times the spending you need your portfolio to cover is something known in retirement planning circles as the 4% rule. By that rule, if you:
- Start with a diversified portfolio
- Withdraw 4% of your nest egg in the first year of your retirement
- Increase your withdrawals annually by the rate of inflation, and
- Keep your portfolio diversified throughout your retirement
... then your money is very likely to last throughout a 30-year retirement.
Get started now
No matter where you are along your career, the sooner you get started building your nest egg, the easier and cheaper it is for you to reach your target for a comfortable retirement. Whether you're worried about the future of Social Security or you simply want more out of retirement than that program can offer by itself, your future self will appreciate the efforts you start today.
Even if you don't quite reach your overall goal, every dime you've got saved when you do call it quits is money that you can spend to give yourself a more comfortable retirement. So get started now, and put yourself on the path to a more comfortable future than you could get from Social Security alone.