Social Security serves as a key source of income for millions of retired seniors. But if you're not yet retired, it's important to understand what to expect from your benefits.
But first, let's talk about how much income you're likely to need in retirement. There's no perfect way to estimate what life will cost you once you're no longer working, but as a general rule, you should expect to need about 70% to 80% of your former paycheck to maintain a comfortable lifestyle once your career comes to a close.
Of course, there's some wiggle room with this formula. If you expect to move to a part of the country with a much lower cost of living than what you're used to, downsize your living space substantially, or spend your days paying little to nothing for entertainment, then you may be able to get by on less income -- say, more like 60% of your former paycheck. But aiming for that 70% to 80% increases your chances of not winding up cash-strapped when you're older.
With that in mind, you should also know that Social Security will generally replace about 40% of your pre-retirement income if you're an average earner. If your income is above-average, it will replace an even smaller percentage. As such, you really shouldn't plan to retire on Social Security alone. If you do, there's a good chance you'll wind up overwhelmingly unhappy when your bills start piling up and you don't have the money to keep up with them.
Don't count too much on Social Security
The average Social Security recipient today collects about $18,000 a year. Chances are, that's not enough money for you to live on, so rather than risk struggling during your golden years, make an effort to save independently while you still have a steady paycheck coming in. If you manage to sock away $300 a month in a 401(k) or IRA over the next 25 years, and you invest your savings at an average annual 7% return, which is a reasonable assumption for a stock-heavy portfolio, you'll wind up with $228,000. Make it $500 a month, and you're looking at $379,000.
Now to be clear, neither sum is a tremendous amount of money in the course of what could be a 20-year retirement or longer. But it's certainly better than entering your golden years with no savings at all.
Of course, if you don't have 25 years of work ahead of you, you'll have to part with more money each month to make strides in your IRA or 401(k). But if you don't make an effort to supplement your Social Security benefits, you're likely to wind up short on cash.
That said, there are ways to boost your retirement income outside of an IRA or 401(k). You could get a part-time job as a senior, rent out a portion of your home, or sell your home and use the proceeds of that sale as another cash source. The key, however, is to not rely too heavily on Social Security, because those benefits will only get you so far.
Boost your benefits for added financial security
While it's not prudent to plan to live on Social Security alone, it does pay to raise your benefits if you don't have much retirement savings and aren't confident in your ability to keep generating income as a senior. The easiest way to do so is to delay your filing past full retirement age. For each year you hold off on claiming Social Security upon being eligible to collect your monthly benefits in full, you'll boost those benefits by 8%, up until you turn 70. And any increase you snag by waiting will remain in effect for the rest of your life.
Being realistic about Social Security will help you better plan for retirement. Now that you know how much income those benefits will actually replace, and how much replacement income you'll actually need, you'll be better positioned to make smart decisions that keep you financially healthy when you're older.