Social Security recently announced that its beneficiaries would be getting a 1.3% payment boost in 2021, thanks to an increase in the consumer price index it uses to measure inflation. With the average retiree receiving $1,519.07 per month, that works out to an average increase of $0.65 per day. If that isn't challenging enough, beneficiaries who also receive Medicare will likely see a significant portion of that meager increase eaten up by increases in their Part B premiums.

That raises a very key question: What exactly are you supposed to do with that 2021 Social Security raise of $0.65 per day (or less after Medicare costs)? If nothing else, that number is so low that it should serve as a warning for those who aren't yet receiving Social Security. It should alert you to the fact that if you expect anything resembling real inflation in your retirement, you need to plan beyond Social Security to have a chance of fighting it off over time.

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Why retirees likely need stocks

That real risk of inflation is a key reason why retirees should keep something invested in stocks, even once they stop drawing a paycheck and start relying on their portfolio to cover their costs of living. As a general rule, you shouldn't have money you expect you'll need to spend over the next five or so years tied up in stocks, but money for your longer-term future is fair game for equities.

So if you expect to need $40,000 per year in retirement and are getting $18,000 from Social Security, then you'll need your portfolio to cover $22,000 per year. Covering five years of $22,000 per year from your portfolio would require $110,000 -- maybe a bit more to account for inflation. That represents the minimum that you should sock away in a more conservative place than stocks to cover your near-term costs.

Anything in your portfolio above and beyond that is a candidate to be invested in stocks to help cover your longer-term needs. This is important because even 30-year Treasury bonds are yielding less than 1.7%, which makes it unlikely they will keep up with inflation after considering the taxes you pay on owning them.

Although stocks are generally much more volatile than bonds, stocks also have a better potential for long-term growth at a faster rate. That faster potential growth gives stocks a fighting chance to keep up with or even beat inflation over time, even after considering the taxes you pay on your dividends and gains. That combination of higher volatility and higher potential returns is why stocks make lousy assets for your short-term needs, but may be the right assets for covering your longer-term needs.

Get started now

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Of course, to have the money to cover for the gaps Social Security won't, you need to have your nest egg available before you retire. The earlier you get started saving, the easier it will be to have that money saved up, as you'll be able to sock away less each month to wind up with what you need.

There's a rule of thumb for retirement planning known as the 4% rule. If you follow that rule, you can spend 4% of the value of your portfolio in the first year of your retirement and increase your withdrawals in line with inflation each year after that. If you start with a balanced and diversified portfolio and keep it that way, you'll have a good chance of seeing that portfolio last at least as long as a 30-year retirement.

Based on that 4% rule, if you would like your portfolio to cover $22,000 of income gap per year, the total value should be worth $550,000 by the time you retire. The table below shows how much you need to save each month to reach that target, depending on what rate of return you earn and how many years you have available to save.

Years to Go

10% Annual Returns

8% Annual Returns

6% Annual Returns

4% Annual Returns









































The stock market's long-term returns have been somewhere in the neighborhood of 10% annualized, but those returns are not guaranteed, and they're certainly not consistent. That's why you can't rely on stocks for your near-term spending needs. Still, the potential for faster growth is exactly why even retirees can make a good case for owning stocks. It's also what gives you the chance to accumulate the nest egg you need to cover what Social Security won't, while saving at a more achievable rate over time.

If Social Security's raise of $0.65 per day doesn't seem like it's enough to cover the increases in costs you're feeling, you're not alone. Just be sure to have a clear picture of what it will take to have a legitimate shot of truly covering your costs, and start preparing now. The sooner you get started, the better your chances of accumulating what you need, by the time you need it.