Social Security only covers 40% of your salary – have you planned the rest? – Community News
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Social Security only covers 40% of your salary – have you planned the rest?

Most employees plan to use Social Security to cover their retirement costs, but many don’t realize that the program was only intended to cover about 40% of the employee’s average income before retirement. That leaves a lot for people to self-finance.

It can be a daunting task, but the right savings strategy can make it a lot easier. Here’s how to prepare for what Social Security won’t cover.

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Image source: Getty Images.

How Much Can You Expect From Social Security?

While 40% is the average income replaced by Social Security, it can more or less cover it for you. The first step in figuring out how much to save yourself is to know approximately how much you will get from the program.

The easiest way to do this is to create a My Social Security account and use the associated benefit calculator to estimate the size of your monthly checks at your chosen starting age. This calculator uses current data from the IRS on how much you’ve paid in Social Security taxes over the years, so it should give you a good idea of ​​what to expect. If you are married and your spouse also plans to claim benefits, repeat this process for him.

Then compare your estimated annual Social Security benefit with your estimated annual retirement cost. For example, if you qualify for the average monthly Social Security benefit of $1,560, you would have an annual benefit of $18,720. If you think you’ll spend about $50,000 a year on retirement, your Social Security checks would cover about 37% of your annual expenses.

That would leave you with about $31,280 to pay each year alone, not counting inflation. If you planned to retire before you started Social Security, you would also need to save enough to fund all of your expenses during those years on your own.

Where should you store your savings?

Once you know approximately how much you need to save for your own retirement, you need to decide where to put your savings for maximum benefit.

401(k): If you qualify for a 401(k) with a company match, this is the best place to start. Put your money first here and do your best to claim the full match every year. This will ease some of the savings burden for you. Once you’ve found your match, you can continue to save your savings here, or you can try another account.

IRA: An IRA is a solid choice if you want more investment opportunities. You can also decide for yourself when you want to pay tax on your money. Paying taxes in advance with a Roth IRA is a popular choice for those who believe they will be in the same or lower tax bracket when they retire than they are now. This will help them save money compared to paying taxes on their withdrawals in retirement with a traditional IRA.

HSA: You can also try a health savings account (HSA) if you have health insurance with a deductible of $1,400 or more for an individual or $2,800 or more for a family. This isn’t technically a retirement account, but your contributions to it give you a tax break, just like contributions to most retirement accounts. In fact, you can withdraw the money for medical expenses tax-free at any age. However, you should try to avoid this if you use the account for retirement savings.

You may need more than one retirement account, depending on how much you plan to contribute each year. IRAs only allow you to contribute $6,000 per year or $7,000 if you are 50 or older. HSA limits are even lower. You can contribute up to $3,600 if you have an individual health insurance plan or $7,200 if you have a family plan in 2021. These limits will increase to $3,650 and $7,300 for 2022, respectively.

With a 401(k), you can contribute up to $19,500 in 2021 or $26,000 if you’re 50 or older, so one of these accounts is a good choice for those looking to set aside significant amounts. These limits will increase to $20,500 and $27,000 by 2022.

How do you keep yourself on track?

Ideally, you can save enough in your retirement accounts each month to make steady progress toward your goals. If you’re not sure how much you need to save each month, you can use a retirement calculator to help you out.

But it is not always possible to save as much as you want for your retirement. You should still set aside as much as you can, but you can’t just leave it at that. If you know you’re falling short, you’ll need to change your retirement plan.

You may need to delay retirement to give yourself more time to save. Or you may need to save even more money in the future if you have a few months where you can’t save as much as you’d like. The important thing is to make these decisions right away so you know how to keep yourself on track.

Check in with yourself at least once a year and whenever you experience a major financial change. You don’t have to spend a lot of time on it, but make these regular check-ins a habit so that you always know what you need to do to achieve the retirement you want.

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