Many retirees rely primarily on Social Security for income, but that doesn't mean it's enough. Here's what you need to know about how much your Social Security benefit might be, and whether or not it'll be enough to support you in retirement.
Spoiler alert: It probably won't be enough
Many retirement experts say that you should anticipate needing 80% of your pre-retirement income to maintain your standard of living after you retire. So, let's take a look at an example.
Let's say that your average income throughout your career was the 2014 American household average of $65,000, which translates to $5,417 per month. Social Security benefits are based on an inflation-indexed average of your 35 highest-earning years, and the following formula is applied to calculate your full retirement benefit.
- 90% of the first $856
- 32% of the amount between $856 and $5,157
- 10% of the amount above $5,157
So, a retiree with an average income of $65,000 can expect a monthly Social Security benefit of $2,662, or about $31,950 per year -- more than $20,000 short of the estimated need.
Other variables to consider
This isn't a universal rule, and there are other factors to take into account -- specifically, the expected quality of living in retirement, the possibility of delayed Social Security, and spousal benefits. So, let's consider these one at a time.
In our example, a Social Security income of almost $32,000 is probably enough to support a basic standard of living. However, the point is that to live on Social Security alone, this person would likely need to cut back considerably from their pre-retirement standard of living, which was supported by a salary more than twice this much.
However, many retirees are completely willing to live a simpler lifestyle in retirement, or to relocate to an area with a lower cost of living. As a personal example, I have a friend who retired to Belize and lives quite comfortably on about $20,000 per year.
Another option is to delay Social Security past your normal retirement age, which results in an 8% increase per year. For example, the normal retirement age for those retiring now is 66 years old. Delaying until age 70 would mean a 32% increase in benefits. So, in our previous example, the $31,950 per year would grow to more than $42,100 -- which could potentially make the difference between "enough" and "not enough."
Finally, spouses are entitled to half of the other spouse's benefit, even if their own work record doesn't justify it. If one spouse gets a full retirement benefit of $31,950, as in our example, the other spouse would get $15,975, even if they never worked at all. This combines to an annual benefit amount of $47,925, which may indeed be enough to live a comfortable life with minimal sacrifices.
However, neither of the previous two factors resulted in a Social Security benefit that equals 80% of pre-retirement income, so Social Security is still unlikely to be enough.
Social Security can (and probably will) change before you retire
The final point I'd like to make is just because you estimate your Social Security benefit today doesn't mean it won't change by the time you reach retirement age – and this is especially true if you're relatively young (under 50).
I've written before that Social Security is unsustainable in its current form, and something will need to be done to fix it. And, some of the solutions that have been suggested include increasing the full retirement age, reducing benefits for higher-income individuals, and taking more than 35 years into account when computing the benefit.
The point is that there's a real possibility that the Social Security benefit calculation might not be quite as generous as it is today once you get there.
The Foolish bottom line on Social Security
In a nutshell, Social Security is unlikely to provide a comfortable retirement all by itself, unless you drastically reduce your standard of living. The best way to prepare for retirement is to start saving and investing now, and treat Social Security as a bonus, not as your main retirement plan.