Many people assume that they'll manage just fine on Social Security once they enter retirement. And that line of thinking often leads them away from building savings.
You, too, may be convinced that Social Security will more than take care of your future living expenses. But when you see what the program pays the average beneficiary today, you might quickly change your mind.
Does a $1,559 monthly paycheck work for you?
The average senior on Social Security today collects $1,559 a month. Now before we go any further, we need to make one thing clear, and it's that your benefit could end up looking very different.
If you're a lower earner, you could end up collecting a lot less on a monthly basis. And if you're a higher earner, your benefit could, in turn, be a lot more generous.
The age you sign up for benefits at will also dictate how much monthly income you receive from Social Security. You're allowed to file for benefits as early as age 62. Doing so, however, will slash those benefits significantly.
Once you reach full retirement age (which is either 66, 67, or somewhere in between, depending on your year of birth), you'll be eligible for your full monthly benefit based on your earnings history. And if you delay your filing past full retirement age, you'll score a higher benefit.
The best way to find out what benefit you may be in line for is to create an account on the Social Security Administration's website and access your most recent annual earnings statement. But keep in mind that the further away from retirement you are, the less accurate that estimate will be. And so it's not a bad idea to keep the average monthly benefit of $1,559 in mind when you think about Social Security as a future income source.
Now with that said, you may very well manage to live modestly once your career comes to an end. By then, you might have a paid-off mortgage, minimal transportation costs in the absence of a commute, and fewer obligations due to no longer working.
On the flipside, you might have higher healthcare costs, more expensive utility bills since you may be home more often, and other costs related to the very necessary act of keeping busy once you no longer have a job to report to. And so a $1,559 monthly paycheck may not cut it.
Make an effort to save
Even if you plan to live frugally in retirement, depending on Social Security alone could leave you cash-strapped at a time when you deserve better. To avoid that fate, do your best to sock some amount of money away in an IRA or 401(k) plan during your working years.
This isn't to say that you have to save thousands of dollars a month. But saving a few hundred dollars a month could go a long way. In fact, if you were to sock away $300 a month over a 40-year period, and invest your savings at an average annual 8% return (which is a bit below the stock market's average), you'd wind up with a pretty impressive $933,000.
Social Security could end up providing you with a nice chunk of retirement income. But living on it alone is a decision that could backfire -- and leave you with a very limited budget throughout your senior years.