Longer life expectancies and a rising cost of living mean the average worker now expects to spend $1.8 million in retirement, according to a recent Schwab study. Yet many people struggle to build nest eggs of anywhere close to that size that during their careers.
You'll probably have Social Security benefits to help you, but it's important to have a realistic idea of how far these checks will go. Below, we'll look at how much of a typical retiree's expenses today's checks will actually cover and what you can do if you're worried about falling short of being able to cover your needs.
Image source: Getty Images.
What does a typical retirement look like?
Retirement looks different for everyone. There are really only two things we can be sure about: It will cost money, and it will end eventually. The average retirement age in the U.S. is currently about 66, according to a recent Gallup poll. And the average 66-year-old male today can expect to live another 18.5 years while his female counterpart can expect to live another 21 years. For round numbers, let's just assume that the average retirement will last 20 years.
The typical household headed by someone 65 or older spent $57,818 in 2022, according to the Bureau of Labor Statistics. That's the most recent government data available on the subject, but inflation has undoubtedly made life a little more expensive since then, so let's assume $60,000 in annual expenses -- again, for round numbers.
A retirement of 20 years with expenses of $60,000 a year gives us an estimated total retirement cost of $1.2 million. But these figures are looking at someone retiring today, and they don't take into account inflation or unplanned expenses that could increase how much you need. So a $1.8 million estimate for retirement expenses isn't unreasonable.
How much of your expenses will Social Security cover?
The average Social Security check as of February 2024 is about $1,911 per month. That amounts to nearly $23,000 per year. Over the course of a 20-year retirement, you'd wind up with about $458,640 in benefits, not counting annual cost-of-living adjustments (COLAs). Even including these, you'd still be a far cry from the $1.8 million you might need for retirement.
Some households could get more than this amount. Married couples may either have two retirement benefits or one retirement benefit and a spousal benefit. If both spouses qualified for a $1,911 monthly check, Social Security would pay the couple over $917,000 over the course of a 20-year retirement. But that still leaves a significant sum that the couple will have to cover on their own.
There's also the uncertainty about Social Security's future to consider. The program's trust funds -- which cover the differences between the wage taxes coming in each year and the benefits flowing out -- are running out of money. If Congress doesn't pass new legislation that bolsters the program's finances, benefit cuts are possible within a decade. This would make it even harder for seniors to make ends meet on Social Security alone.
What should seniors do?
We should all prepare for the fact that Social Security won't cover all of our expenses in retirement. It was never designed to do so. In an ideal world, you will have personal savings stashed in retirement accounts and investments that you can draw upon to cover the remainder of your costs. But many workers struggle to set aside cash after paying their monthly bills.
Working longer or opting for a phased retirement is another option. Phased retirement is where you gradually reduce your hours over time rather than going from working full time to full retirement all at once. Both approaches give you access to steady paychecks for longer while reducing the cost of your retirement. They also enable the investments you do have to grow for longer before you start depleting them.
Some seniors may also qualify for additional benefits, like supplemental security income (SSI). This is another type of monthly benefit administered by the Social Security Administration that could provide the average single adult who qualifies with up to $943 per month and the average qualifying married couple up to $1,415 per month in 2024.
You could also try reducing your expenses in retirement further than you had expected. But it's best not to rely upon this as your primary strategy. You never know when unplanned expenses will arise. Instead, consider a combination of the tips above to help you cover what Social Security doesn't.
