You'll often hear that retiring on Social Security alone isn't a good idea because those benefits will only replace about 40% of your pre-retirement wages. And that 40% figure assumes two things: you earn an average income and benefits aren't slashed broadly once Social Security's trust funds run out of money. If the latter happens, you'll get even less replacement income out of Social Security.
While you may be aware that it's important to have savings to fall back on in addition to Social Security, the question is, how much of a nest egg do you need? That's not an easy question to answer, but here's how to tackle it.
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Think about your needs and anticipated lifestyle
The good thing about Social Security is that you can get an estimate of your monthly benefits well before you're ready to claim them. Just create an account on the Social Security Administration's website and access your most recent earnings statement. It should give you an idea of the monthly benefit you can look forward to, assuming your income doesn't change drastically and that benefits aren't cut.
Of course, the closer you are to retirement age, the more accurate that estimate of your benefits is apt to be. But it's a good starting point, even if you're younger.
From there, try to figure out an annual retirement budget, based on factors such as where you'll live and what you expect to do with your time. Also, think about whether you're willing and able to work in retirement in some capacity. If you expect to generate $500 a month of income selling crafts or $1,000 a month consulting in your former field, that's less money you'll need to sock away.
From there, it's a matter of crunching some numbers. Let's say you expect to need $4,000 a month to live comfortably and you don't intend to work. If Social Security will most likely pay you $2,000 a month, you'll need another $2,000 a month, or $24,000 a year, from your savings. If we assume that you'll withdraw from your nest egg at a rate of 4% per year, that means you'll need $600,000 in savings going into retirement.
These calculations don't account for Social Security cuts. So in this example, aim for another $100,000 to $200,000 in savings in case those cuts end up happening. This way, you'll have more financial leeway.
Don't rely on Social Security alone
Many seniors make the mistake of retiring on just Social Security and regret it afterward. Not only should you aim to bring a nice amount of savings with you into retirement, but also do your best to land on the right savings goal.
There may not be a perfect formula to follow in this case. But if you do your best to estimate your expenses while factoring in Social Security, you'll put yourself in a better position to avoid financial struggles once your career wraps up.
