Millions of seniors today collect Social Security in retirement and use those benefits to help pay their living costs. But if you're nearing your senior years without much or any savings, you should know that those benefits can't bail you out as you might expect them to. And the sooner you recognize that, the sooner you can take steps to improve your financial picture -- and avoid a cash-strapped existence once your career closes out.
Social Security will only get you so far
The average senior on Social Security today collects $17,748 a year in benefits. Compare that number to your current annual income and see how the numbers line up. You'll see that it equates to barely more than the minimum wage in most states, and living on that sum would probably mean making a host of lifestyle sacrifices you're not keen on doing.
Here's another way of looking at it: Social Security will replace about 40% of your pre-retirement income if you're an average wage earner. But most seniors need roughly double that amount to live comfortably.
When you think about what your senior expenses will look like, you'll see why. Though it's true that many retirees manage to pay off their homes before leaving the workforce, even if you're able to do the same, the rest of your current expenses will likely continue to apply after your career ends.
Sure, you might save some money on fuel costs to account for not having to commute, but chances are that you'll still need a car and the insurance that comes with it. You'll also need to pay for home maintenance and repairs, property taxes, food, utilities, and clothing. And if you're used to a heavily subsidized health insurance plan through your employer, you'll probably find that your healthcare expenses go up in retirement under Medicare.
The takeaway? Planning to live on 40% of your income may not be feasible, desirable, or realistic. And that's why you can't neglect to save for retirement and look to Social Security to make up for it.
Change your financial fate
If you're nearing retirement with little money in your 401(k) or IRA, don't give up. As long as you still have an income, you have a chance to build some savings. And having some money in your nest egg is better than having none.
For starters, aggressively cut back on living expenses. It won't be easy, but it may, for better or for worse, prepare you for some of the changes that may lie ahead if you don't make an effort to boost your savings. While moving to a smaller home might seem like a ridiculous extreme, downsizing is a great way to free up large amounts of cash. But if that doesn't work for you, make a number of smaller changes that add up. Eliminate restaurant meals, stop paying for cable, don't take big vacations, and cancel the gym membership you rarely use.
If you're able to free up $500 a month for retirement savings, and invest that money at an average annual 7% return (which is doable with a stock-heavy portfolio) over the next seven years, you'll give yourself $52,000 to work with. It's not a lot of money, but it's better than nothing.
At the same time, consider getting yourself a second job to fund your nest egg. If earnings from a side hustle allow you to save $1,000 a month over the next seven years instead of just $500, you'll be sitting on $104,000, assuming that same 7% return.
Finally, consider extending your career. Working even a couple of years beyond your desired retirement date will allow you to not only pad your nest egg, but also leave your existing savings untouched for longer. And saving $1,000 a month over nine years instead of seven will leave you with $144,000 for retirement (again, assuming that 7% return).
Social Security may be a valuable source of income for seniors, but you can't live on it alone. Acknowledging that sooner rather than later will put you in a better position to salvage your senior years and avoid financial troubles throughout them.