It's a sad truth that 60% of baby boomers are more afraid of running out of money in retirement than they are of dying. But given how little today's older workers have saved up for retirement, that fear isn't unfounded.
In a recent Galllup poll, 43% of workers aged 50 to 64 say they intend to rely on Social Security as a significant source of retirement income. And while the program is scheduled to continue paying benefits at their current level for at least another 17 years (beyond which benefits could be cut), this attitude among boomers is cause for major concern.
Social Security is only designed to replace roughly 40% of the average worker's pre-retirement income. And if you think you can live off just 40% of your former earnings, here's a reality check: Healthcare alone will cost the average healthy 65-year-old couple $377,000 over the course of their retirement. Throw in housing, transportation, clothing, utilities, and meals, and retirees need to replace at least 70% to 80% of what they previously earned, unless they're willing to cut every expense to the bone.
You can certainly count on Social Security as a form of supplemental retirement income. Those who save independently but factor retirement benefits into their budgets aren't necessarily doing themselves a disservice -- especially since, according to the latest projections, Social Security can keep up with scheduled benefits until 2034, which leaves Congress plenty of time to save the program from future cuts. But according to Gallup data, prior to the 2008 recession, older workers were more likely to cite their 401(k)s as a major source of retirement income. Nowadays, those same workers are relying more on Social Security and less on their own savings.
The good news is that baby boomers, especially younger ones, still have some time to ramp up their savings and salvage their long-term financial security. But those who continue to bank on Social Security as their primary source of retirement income will likely find themselves in the dreaded situation of being cash-strapped in their old age.
We're not saving enough
The Economic Policy Institute reports that an estimated 41% of baby boomers have no money saved for retirement at all. But even those who are saving aren't doing such a great job. The median savings amount among workers aged 56 to 61 is a measly $17,000, which is a drop in the bucket.
Meanwhile, this group's average savings amount -- which is skewed by extremely large figures and therefore doesn't represent the typical nest egg -- is $163,577. That may sound impressive, but it won't get a typical senior very far. Let's assume you're a two-person household that has saved up that amount for retirement. Let's also assume you and your spouse are each eligible to receive $1,360 a month in Social Security benefits, which is what the average beneficiary gets today. If we spread that $163,577 out over 20 years (which is a conservative estimate, as many seniors are living longer than that), we're looking at $8,178 a year, or $681 per month, of income. Add in $2,720 from Social Security benefits ($1,360 x 2), and you have $3,401 per month to spend, or $40,812 per year.
Now think about what you're currently spending. While a few of your costs might drop once you stop working, the majority of your expenses are likely to stay virtually the same. Some, like healthcare and leisure, will probably go up. And while $40,812 a year in income might seem livable, when you consider that $18,850 of that could get eaten up by healthcare off the bat, suddenly, that number looks less impressive.
This all assumes you have that $163,577 to work with -- and most near-retirees don't. If you depend on Social Security alone, and you're an average earner, you'll have just $16,320 a year to work with once you retire ($32,640 if both you and your spouse collect benefits). And that just plain won't cut it.
There's still time to catch up
While you can't make up for all those years you may have neglected your IRA or 401(k), you can take steps to make yourself less reliant on Social Security down the line. For starters, work on maxing out your IRA or 401(k) contributions. If you're aged 50 or older, you can put up to $6,500 a year into the former and $24,000 a year into the latter.
Along these lines, it pays to consider postponing retirement if your savings aren't where they should be. If you have a 401(k) and you manage to max it out for the next 10 years, you'll have another $302,000 in retirement savings to work with, assuming your investments generate a moderately conservative 5% average annual return during that time. If you can't max out your retirement plan contributions, save whatever you can, even if it's only a few thousand dollars a year.
While Social Security will provide a modest chunk of income in retirement, it won't cover your costs in their entirety. And if you don't start thinking of a backup plan, you're bound to run into trouble during what could be the most financially vulnerable period of your life.
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