Relying solely on Social Security in retirement may not be your best bet | Personal Finance

(Stefon Walters)

Like most things to do with personal finances, the amount you will need in retirement is very specific to your personal situation. However, there are good baselines you can use to get a rough idea of ​​how much so you can then adjust accordingly.

Start with how much you need annually. In general, you should aim to have about 80% of your annual income after retirement to maintain your lifestyle. You can adjust this percentage based on whether or not you plan to lower or upgrade your lifestyle when you retire. Are you planning to downgrade? Go less. Planning to upgrade? Go with more.

To get an idea of ​​how much you will need in total when you retire, you can use the 4% rule.

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The 4% rule says you should plan to withdraw 4% of your savings (adjusted for inflation each year) for 30 years without worrying about surviving. With current inflation rates, it might be better to bring the starting rate closer to 3%, but 4% is the traditional starting point.

You can find your target savings goal by multiplying your ideal annual amount by 25. Here are examples of how much someone might need according to the 80% and 4% guidelines:

Current Income Annual amount needed for retirement Totally needed to retire
$50,000 $40,000 $1 million
$100,000 $80,000 $2 million
$150,000 $120,000 $3 million

Data source: Author’s calculations.

Unfortunately, for most people, this means that Social Security alone will not be enough to live comfortably after retirement.

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When you take benefits matters

The amount you receive from Social Security mainly depends on your lifetime earnings (higher earnings, higher benefits) and your full retirement age, which is based on your year of birth.

year of birth Full retirement age
1943 to 1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67

Data source: Social Security Administration. Chart by author.

Your full retirement year is the basis for calculating your benefits, but you can start as soon as you turn 62. However, doing so will lower your monthly payout. Conversely, if you delay your payout beyond your FRA, your monthly payout will increase until you reach 70. to have to get benefits at 70, but they won’t increase after that, so you might as well start.

Even with higher monthly payments, Social Security alone may not be enough for many people.

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For 2022, here are Social Security’s maximum monthly monthly payouts:

  • Age 62: $2,364
  • Full Retirement Age: $3,345
  • Age 70: $4,194

Even if you get the maximum monthly payout — which most don’t — you’d be getting about $28,000, $40,000, or $50,000 annually, respectively. The average monthly payout, $1,623, would add up to just under $20,000 per year.

If we follow the 80% rule, those amounts may not be enough for many people to thrive in retirement.

Retirement doesn’t mean life will get drastically cheaper. You can save on some costs (commuting), but other costs (care) will often increase. When you retire, it should be out of need and not out of necessity. That’s why it’s important to have multiple sources of retirement income rather than relying solely on Social Security.

By taking advantage of other retirement accounts, such as a 401(k) and IRAs, and the associated tax benefits, you can not only properly prepare yourself for retirement, but you can also please yourself in the present.

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