Please ensure Javascript is enabled for purposes of website accessibility

Social Security Will Replace This Much of Your Income

By Maurie Backman – Sep 23, 2019 at 7:04AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Hint: It's probably less than you think.

Millions of seniors rely on Social Security to provide a substantial portion of their retirement income. But should you do the same? The reality is that those benefits won't come close to taking the place of your former paycheck, and the sooner you realize that, the sooner you can ramp up your retirement savings efforts to avoid an income shortfall during your golden years.

You can't live on Social Security alone

Social Security will generally replace about 40% of your former income if you're an average earner. If you're a higher earner, it'll replace even less. That 40%, however, assumes that benefits aren't cut in the future due to funding issues.

Social Security cards

IMAGE SOURCE: GETTY IMAGES.

Most seniors, meanwhile, need a good 70% to 80% of their previous earnings to pay the bills in retirement, especially when we consider that most living expenses don't really go down during that time. If you pay off your mortgage prior to retirement, you may see a dip in your housing expenses. But the rest of your bills, like utilities, cable, and food, are likely to hold steady.

That's why relying on Social Security alone for retirement income is a big mistake. If you do, you could really wind up struggling to keep up with your bills, and you may have to cut back on modest luxuries just to make ends meet.

Secure your own future

It's OK to factor your Social Security income into your retirement budget. In fact, you should. But you should also make a point to save independently during your working years to ensure that you have enough money to cover your senior living expenses.

Currently, you can contribute up to $19,000 a year to a 401(k) if you're under 50, or up to $6,000 a year to an IRA. If you're 50 or older, you get a catch-up option that raises these limits to $25,000 and $7,000, respectively.

But you don't need to max out your retirement plan to build a solid nest egg. Many workers, in fact, can't max out. However, if you're able to set aside $300 a month, here's what your savings balance could grow to, depending on how young you are when you start.

If You Start Saving $300 a Month at Age:

Here's What You'll Have by Age 67 (Assumes a 7% Average Annual Return):

22

$1.03 million

27

$719,000

32

$498,000

37

$340,000

42

$228,000

47

$148,000

TABLE AND CALCULATIONS BY AUTHOR.

Keep in mind that the 7% return above is reasonable for a stock-heavy portfolio over a long investment window. But if you're very risk-averse, and therefore won't be putting your 401(k) or IRA into stocks, you'll likely see a much lower return. If that's the case, you'll need to set aside a lot more money each month to mimic the above numbers, so be mindful of that when choosing investments.

Now if you're not used to saving any money for retirement, coming up with $300 a month could prove challenging. But modest lifestyle changes can get you there. If you're willing to eat at home rather than dine out, walk or take buses rather than hail rideshares, and limit non-essential purchases, you might scrounge up that cash rather easily. And if not, there's always the option to make more substantial changes, like downsizing your home or getting a side job for added income.

No matter what steps you take to start building retirement savings, be sure to make it a priority. Though Social Security helps millions of seniors stay afloat, those benefits won't sustain you by themselves. If you don't take steps to supplement them, you're likely to struggle once the time comes for you to leave the workforce.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/04/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.