After you have paid Social Security taxes for years, retirement is the time to reap the benefits with monthly payouts. And although Social Security can be a great source of retirement income, it's likely better to view it as supplemental income and not the primary source.

That's why I'm not counting on Social Security by itself to cover my finances in retirement, and neither should you.

Determining how much you'll need in retirement

The amount of income needed in retirement varies widely based on factors like lifestyle and location. However, you can start your calculations by following some general guidelines. The main two are the 80% rule and the 4% rule, which deal with how much you'll need annually and in total, respectively.

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The 80% rule says you should aim to have around 80% of your annual income in retirement to maintain your current lifestyle. The 4% rule says you should plan to withdraw 4% of your savings (adjusting for inflation each year) annually for 30 years without worrying about outliving your money. To find your target savings goal, multiply your ideal retirement annual income by 25.

Here are examples of how much someone might need using the 80% and 4% baselines:

Current Income Needed in Retirement Annually Total Needed for Retirement
$50,000 $40,000 $1 million
$80,000 $64,000 $1.6 million
$100,000 $80,000 $2 million
$150,000 $120,000 $3 million
$200,000 $160,000 $4 million

Data source: Author calculations.

Social Security likely won't be enough

Your Social Security benefit will largely depend on your lifetime earnings (the more you earn, the higher the benefits) and your full retirement age, which is based on your birth year.

Birth Year Full Retirement Age
1943 to 1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or after 67

Data source: Social Security Administration.

Your full retirement age is the age at which you become eligible to receive your full monthly benefit. You can begin receiving benefits as early as age 62, but doing so will reduce your monthly benefit. Conversely, you can delay your benefits past your full retirement age, increasing them until you reach 70. You don't technically have to begin receiving benefits at 70, but they won't increase past that, so there's no real reason not to take the money.

Here are the maximum monthly Social Security payouts for 2023:

  • Age 62: $2,572
  • Full retirement age: $3,627
  • Age 70: $4,555

Even if we assume someone gets the maximum monthly benefit -- which most won't -- that still wouldn't be enough to carry them through retirement using our 80% rule guidelines. Those maximum payouts are just over $30,800, $43,500, and $54,600 annually, respectively.

And that's assuming a best-case scenario. The average monthly retirement benefit as of January 2023 was $1,779, which is just over $21,300 annually.

It takes a multipronged effort to prepare for retirement

One of the best things you can do to make sure you're financially prepared for retirement is to utilize all the available resources (i.e., retirement accounts). A lot of people are familiar with 401(k)s because they're offered through employers, but fewer people use IRAs.

There are two main types of IRAs: traditional and Roth. A traditional IRA is similar to a 401(k) because contributions can lower your taxable income, depending on your income and filing status, and you'll owe taxes on any withdrawals in retirement. Contributions to a Roth IRA are after taxes, but you can take tax-free withdrawals in retirement.

Whether you go with a traditional or Roth IRA should largely depend on your current tax bracket versus your projected bracket in retirement. If you're in your peak earning years, it makes sense to go with a traditional IRA so you delay paying taxes until you're in a lower bracket in retirement. If your tax bracket is likely to increase at retirement, however, it makes sense to go with a Roth IRA so you pay taxes now instead of later, when you're in the higher bracket.

IRAs have relatively low annual contribution limits -- $6,500 ($7,500 if you're 50 or older) for 2023 -- so they shouldn't be your primary source of retirement income, but much like Social Security, they can be great supplements. If you're saving and investing for retirement, you might as well get tax breaks along the way.