Many people ditch their retirement savings and instead rely heavily on Social Security to cover the cost of their senior living. But if that’s your plan, you might be surprised to learn that Social Security doesn’t pay as much as you might think.
Next year, Social Security will give seniors their biggest raise in decades. But even in spite of this, the typical monthly benefit may not help recipients well to cover their expenses.
What will seniors collect in 2022?
The average monthly Social Security benefit in 2022 will be $1,657. That’s a big jump from the current average monthly benefit of $1,565. We can thank for this a correction of the cost of living of 5.9%.
Now a monthly salary of $1,657 may be enough for some seniors to cover their bills. If you have a paid off house and very little cost, then power manage to just get by in the absence of other income.
But for the most part, $1,657 isn’t a lot of money to live on. And if you’re not convinced, check out what you’re spending right now. Chances are it’s a lot more money. And while you may not have to make any mortgage payments once you retire, the rest of your living costs may remain the same. Some, like healthcare, could even climb.
The point? It is important to have money outside of Social Security to ensure that you have enough income to meet all of your needs.
How can you save efficiently for your retirement?
By building your own nest to supplement your Social Security benefits, you can avoid having financial hardship once you retire. In that regard, your best bet is to save in a tax-advantaged retirement account such as an IRA or 401(k) plan.
With a traditional IRA or 401(k), you get a tax break on your contributions. Then your money grows on a tax-deferred basis and you pay tax on the money you withdraw from your savings.
With a Roth IRA or 401(k), there is no upfront tax benefit on contributions. But investment gains in your retirement plan are tax-free, as are withdrawals.
How much savings should you aim for? A good rule of thumb is to expect that you will need 70% to 80% of your pre-pension during your final years. Social Security will replace about 40% of your former salary if you are an average earner, so your savings should provide the rest.
Now suppose you throw away $300 a month in an IRA or 401(k) over a 30-year period. If your investments in that account yield an average annual return of 7%, you’ll end up with $340,000. That 7% is slightly below the stock market average, so it’s a reasonable assumption for a 30-year investment window.
Of course, the more money you can save for retirement, the better. But either way, the key is to have access to savings so you’re not just dependent on Social Security.
While the average monthly benefit will rise in 2022 and could rise in the coming years, seniors retiring from Social Security alone are often short on cash. If you’d rather not join their ranks, do your part to ensure you have extra income.