Social Security provides an important foundation for most Americans' retirement, but if you're expecting it to be your only source of retirement income, you should seriously revisit that expectation. Even if the program's finances were on stable footing, it was never designed to be a complete retirement income solution. According to the Social Security Administration itself:
Social Security was never meant to be the only source of income for people when they retire. Social Security replaces about 40 percent of an average wage earner's income after retiring, and most financial advisors say retirees will need 70 percent or more of pre-retirement earnings to live comfortably. To have a comfortable retirement, Americans need much more than just Social Security. They also need private pensions, savings and investments.
What can you count on from Social Security?
As of July, the average retiree receives a monthly benefit of $1,300.82 from Social Security, while the average monthly spousal benefit is $655.76. That works out to a monthly benefit of about $2,600 for a two-wage-earner couple, a bit less than $2,000 for a one-wage-earner couple, or about $1,300 for a single or widowed person.
You may be able to survive on that amount if you live frugally as a couple in a low-cost part of the country. Still, even the highest of those figures translates to a yearly total that falls more than $22,000 short of the national median household income. If that weren't enough, there are good reasons to believe that Social Security's inflation adjustments are insufficient to truly cover seniors' costs increases.
On top of that, remember that when one member of a married couple passes, that person's Social Security payment stops. Surviving spouses may receive the higher of their own benefit or their deceased spouses' benefit, but not both. Even if you could live as a couple on a joint Social Security payment of around $2,600 per month, living alone on an income of about $1,300 per month may be challenging.
Furthermore, these numbers presume that Social Security will still be able to pay its expected benefits when you're able to collect. The program's own trustees expect its trust fund to run out of money within the next two decades, forcing it to cut benefits by around 23% unless congressional action is taken to shore up the program. While you can count on the majority of your expected Social Security benefit, some changes to the program are inevitable in the not-too-distant future.
What can you do about it?
Social Security was never meant to be your sole source of retirement income. Regardless of whether you expect your full benefits or only a portion of them, you need to develop another way to cover the rest of your costs once you stop working. The only difference, really, is how much of your retirement that other source will cover.
If you're one of the few who still have a secure pension coming their way, that pension may provide a significant part of your retirement income. Just be careful to clearly understand the terms of that pension. Many pensions do not receive inflation adjustments, and others are "integrated" with Social Security in such a way that your pension benefits decrease once you're eligible for Social Security. If either of those factors affects your benefits, you need to be sure you're fully covered.
For other savings, your employer may offer a tax-deferred retirement plan -- such as a 401(k) or 403(b) -- that lets you redirect part of your salary directly from your paycheck. Those plans often come with matches whereby if you contribute, your employer will match part or all of that contribution. If your employer's plan has a match, it's generally an excellent idea to contribute enough to maximize that match, and it often makes sense to contribute more, too -- up to the maximum your plan allows.
Regardless of what your employer offers, if you earn a paycheck, you're likely eligible to invest in an individual retirement arrangement. Those tax-deferred plans are also great places to invest your money for your retirement and help cover the gap left by your Social Security benefits.
If those plans are not available to you -- or even if they are and you want to save more than the plans will let you invest -- you can always invest in a regular brokerage account. You won't get the tax deferral, but you will have immediate access to your cash without the penalties often associated with qualified retirement plans, and you can invest an unlimited amount.
Social Security alone is rarely sufficient to fund a comfortable retirement. Add it to your pension (if you get one) and your own savings and investments, however, and it can help you achieve the retirement you've dreamed of.