Social Security is enormous. This year alone, some 59 million Americans will receive close to $863 billion in Social Security benefits. These benefits are primarily paid out to retired workers, which is where about three-quarters of that $863 billion will go.
For some retirees, Social Security is practically their sole source of income. According to statistics from the Social Security Administration, 22% of elderly married couples and 47% of unmarried elderly persons rely on Social Security for 90% or more of their income. And the majority of elderly Social Security recipients depend upon the program for more than half of their income (52% of married couples and 74% of unmarried persons.
In other words, a lot of American retirees would be in big trouble without their monthly Social Security checks.
If you're relying on Social Security during your retirement, you may be in trouble
Long story short, Social Security is vital to the well-being of our nation's elderly. But there are two big reasons to be worried if you're counting on Social Security to comprise more than half of your income during your golden years.
To begin with, the average Social Security benefit payment isn't that substantial. There's a reason for this, and it's that Social Security was never meant to supplement the entire nation but was instead implemented to provide a financial backdrop for lower-income individuals who had trouble saving for the future. As such, as of December 2013, the average monthly benefit check paid to retired workers was just $1,294, or $15,528 per year. Within the 48 contiguous U.S. states this average annual benefit is only 33% above the 2014 poverty level for a household of one. The average monthly payments to disabled workers and survivor beneficiaries are even smaller at $1,146 per month and $1,244 per month, respectively.
Clearly everyone's situation will be unique, and for elderly people who have their homes paid off and/or have the financial support of their family, this may not be a big deal. However, a significant number of elderly persons could face serious struggles if their annual income is $15,000 or less. Medical costs alone could wipe out a beneficiary's payments for the entire year -- and then some. Not to mention that 13 states also tax Social Security income, which can reduce beneficiaries' take-home benefits.
The other concern is that the Social Security Trust is expected to exhaust its reserves by 2033. Despite the prevailing myth that this would mean Social Security goes bankrupt, that isn't the case. What it does mean, though, is that unless higher Social Security taxes, other revenue-generating measures, cost-cutting measures, or some combination of the three is implemented, retired beneficiaries' full benefits could be reduced by about 25% in order to keep Social Security solvent. In other words, by 2033 the average beneficiary could be living just above the poverty line based on their monthly income from Social Security.
Three things to do instead
Keep in mind that I'm not denigrating the Social Security program whatsoever. It's a fantastic means of boosting the income of retired workers and providing income to disabled workers who may not otherwise be protected.
What I am suggesting is that Social Security is merely one tool on your retirement-planning tool belt. It's an important component that will help you build a foundation, but you will need other sources of income to retire the way you want to.
One of the tools nearly all working adults should consider using is a Roth IRA. There are certain limitations to Roth IRAs (the contribution limit for 2014 is $5,500, or $6,500 if you're aged 50 or older), but if you qualify, your money is allowed to grow completely tax-free so long as you don't make any unqualified withdrawals. With a Roth IRA you can begin taking your distributions at age 59-1/2 and use the account as your primary source of retirement income, allowing you the opportunity to wait as late as age 70 to take your maximum Social Security benefit.
If your employer offers a 401(k) and matches contributions, you need to take full advantage of that. If you don't contribute at least enough to get the maximum employer match, then you're leaving free money on the table, and that's a mistake you simply can't afford to make.
Finally, it's important to keep investing for your future, regardless of your age. Although the stock market has its ups and downs, over the long run it has proven to be an incredible wealth-creator, averaging between 8%-10% returns throughout history. Staying invested over the long term is important, not only because the stock market has been shown to deliver excellent returns, but because we're living longer than ever, and there will likely be a need for sustainable income beyond what Social Security can offer on an annual basis.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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