We hear a lot about the importance of taking retirement savings into our own hands and not relying on Social Security alone to keep us afloat. But it seems like many Americans aren't really listening. About 50% of those aged 65 and older count on Social Security to provide the majority of their income in retirement, according to research by the U.S. Government Accountability Office. And when it comes to retirement savings, many of us are falling horrendously short. The Federal Reserve System reports that as of 2014, almost one-third of Americans had no retirement savings whatsoever. Not only that, but 31% admitted to not having savings or a pension plan.
That's seriously bad news for millions of Americans who are near retirement.
Why Social Security isn't enough
Clearly, many Americans have a lot of faith in Social Security -- to a fault. You see, Social Security is only designed to replace about 40% of our pre-retirement income. This isn't a secret; it's something the Social Security Administration makes a point of sharing with the public. Yet many of us make the mistake of either ignoring that information or assuming that our expenses will go down enough in retirement to live off Social Security alone, which is not a viable option for most.
Most people need about 70% of their pre-retirement income to maintain a comfortable lifestyle upon exiting the workforce. Want to travel, spend your days on the golf course, or spoil your grandkids rotten? You'll probably need a lot more. The same holds true if you're in poor health and anticipate extra medical expenses. Fidelity estimates that the average cost of healthcare for a 65-year-old couple retiring today and living roughly another 20 years is $245,000, which doesn't include expenses like nursing home or long-term care. At a time in your life when healthcare costs alone can be downright crippling, a 60% pay cut is the last thing you need.
Even if your health is great and you do manage to lower your living costs, surviving on just 40% of your pre-retirement income may not be feasible. Let's say you're married and are used to living on $5,000 a month. If you fail to save for retirement and come to rely on Social Security as your single source of income, you'll be looking at roughly $2,000 instead. Now think about your non-negotiable expenses -- housing, electricity, food, and the like. Even if you're willing to cut corners, is $2,000 a month enough to maintain the lifestyle you want? Probably not, given that in 2014, the average American spent $934 on rent alone. Assuming you fall into that average, that would leave you with just over $1,000 to spend on groceries, utilities, transportation, entertainment, and healthcare. Considering that the latter will cost about $12,000 per couple annually under the best of circumstances, suddenly $2,000 a month doesn't seem like very much.
Ramping up your retirement savings
If you're behind on your retirement savings, then there are steps you can take to dig yourself out of that hole. First, start saving something immediately, whether it's a few hundred dollars a month or a few hundred a year. Any amount of retirement savings is better than nothing, and if you need to start small, do that with the intention of working your way up. If you're 47 and want to retire in 20 years, saving $100 a month starting tomorrow will give you a $41,000 balance if your investments generate a 5% average annual return, which is fairly conservative and well below the stock market's average. Saving a more aggressive $300 per month would more than triple your nest egg to $124,000.
If you're younger, there's even better news: You have more time not only to save, but to invest more aggressively in order to grow your retirement savings exponentially. Say you're 27 and have 40 years till retirement. If you save just $100 a month and invest in stocks that earn an average of 10% per year, then by 67, you'll have over half a million dollars sitting in your retirement account, which will complement your Social Security payments quite nicely.
Even if you're in your 50s and have yet to start saving, there's still hope. You can begin putting money aside now and postpone retirement for a few extra years to build up a more sizable balance. Another option is to work part-time in retirement, which is good not only for your budget but also for your health.
No matter what steps you take to increase your retirement savings, the key is to stop counting on Social Security alone to fund your retirement lifestyle. Social Security can serve as a nice supplement to whatever savings you manage to build up, but relying solely on those benefits means setting yourself up for disaster.