Since President Franklin D. Roosevelt signed the Social Security Bill into law, it has proven to be one of America's most important social programs. After decades of paying Social Security taxes, retirees get to reap the benefits of their long-term contributions with guaranteed income.
There are many great things about Social Security, including the tens of millions of people it financially benefits. However, despite its advantages, there is one major drawback: It won't be enough to cover many people's retirement expenses. Let's take a look at why that might be the case.
Image source: Getty Images.
Determining how much you may need in retirement
Retirement looks different for everyone, so there's no one-amount-fits-all number that can be universally applied. Someone who plans to travel full-time will probably need more than someone who plans to spend their days relaxing on the beach. Someone retiring in Southern California will probably need more than someone retiring in Mississippi.
That said, there is a baseline that can be used to help people get an idea of how much they'll need in retirement. It's called the 80% rule, which says you should try to have 80% of your annual pre-retirement income in retirement to maintain your current lifestyle. Following that rule, here's how much someone would need based on current income:
| Current Income | Target Annual Income | Target Monthly Income |
|---|---|---|
| $50,000 | $40,000 | $3,333.33 |
| $80,000 | $64,000 | $5,333.33 |
| $100,000 | $80,000 | $6,666.67 |
| $120,000 | $96,000 | $8,000 |
| $150,000 | $120,000 | $10,000 |
Calculations by author.
Again, the 80% rule is a baseline, not the end-all-be-all. If you plan to downsize your lifestyle, you can lower the percentage, and vice versa. Either way, it's a great starting point.
Where Social Security comes up short for most people
Thanks to the cost-of-living adjustment (COLA), Social Security benefits are increased in most years. In 2024, the COLA increased benefits by 3.2%. Below are the maximum monthly payouts based on claiming age:
| Claiming Age | Maximum Monthly Benefit |
|---|---|
| 62 | $2,710 |
| 65 | $3,426 |
| 66 | $3,652 |
| 67 | $3,911 |
| 70 | $4,873 |
Data source: Social Security Administration.
In many cases, there is a noticeable gap between the recommended monthly amount to have in retirement and how much someone can expect to receive from Social Security. The above table contains maximum benefits, too, meaning most people won't come close to receiving those amounts.
For perspective, the average monthly Social Security retirement benefit as of January 2024 was $1,909.
Social Security should be one part of the retirement income puzzle
Ideally, you have multiple sources of retirement income and can use Social Security as supplemental income. Retirement accounts and a brokerage account should round out the trifecta if possible. A 401(k) is the most common retirement account, and many people are familiar with it. However, it's not the only retirement account available. IRAs are great retirement account options that can make up for some of the limitations of a 401(k).
A traditional IRA works similarly to a 401(k) because you make contributions with pre-tax dollars, possibly lowering your taxable income for the year. Whether your contributions are tax-deductible depends on your filing status, your income, and whether you're covered by a work-sponsored retirement plan (like a 401(k)).
On the other hand, a Roth IRA has a unique tax benefit. With a Roth IRA, you contribute after-tax dollars and then are able to take tax-free withdrawals in retirement. Having your money grow and compound with no taxes waiting for you in retirement could save you thousands of dollars.
A brokerage account doesn't have the tax breaks that come with retirement accounts, but it does offer flexibility, allowing you to tailor your investments to ensure they meet your retirement goals and risk tolerance. Preferably, you max out your IRAs if possible (the limit in 2024 is $7,000, or $8,000 if you're 50 or older) and then resort to your brokerage account.
Using Social Security, retirement accounts, and a brokerage account will put you in the best position to ensure you're as financially prepared as possible for retirement. It's always better to be overprepared than underprepared.
