Whether you’re 20 or 10 years away from retirement, it’s critical to plan how you’ll supplement your income and spend your money during your golden years. For many soon-to-be retirees, this means figuring out how to spend their Social Security checks.
According to the Bureau of Labor Statistics’ 2019 Consumer Expenditure Survey, Americans 65 and older spend an average of $50,000 per year on necessities such as food, housing, transportation, and healthcare. However, the average monthly Social Security benefit for retired workers is $1,615.81 per month, or $19,389.72 per year. If you plan to rely solely on Social Security, you’ll quickly realize that it won’t be enough to fully fund your retirement lifestyle.
Still, you don’t want to deplete your Social Security benefits. As a result, it’s critical to carefully budget and spend your benefits wisely. Continue reading to find out what you should do with your Social Security check.
Even if you’ve only recently turned 62 and are eligible for Social Security retirement benefits, it’s important to remember that you don’t have to start receiving them right away. In fact, some people believe that waiting an additional eight years is a wise financial decision.
Why would anyone wait to receive benefits to which they are entitled? In a nutshell, money. The longer you wait, the greater your monthly payment will be. For those born in 1943 or later, Social Security benefits increase by 8% per year for each year of deferral after the age of 62, up to the age of 70. If you don’t need the money right away and have other sources of income or savings, do the math to see if deferring your checks makes sense.
Check Your Income Record
The Social Security Administration calculates your Social Security benefit based on your highest 35 years of earnings. Because any record can contain mistakes or gaps, you should double-check your Social Security income record before applying for benefits. If the Social Security Administration misses one or two of your highest-earning years, for example, your benefit could be permanently reduced.
Create an account to verify your Social Security record. This is where you can view your earnings history as well as other important information such as your projected future retirement, disability, and survivors benefits. If you discover any errors, please contact the SSA at 1-800-772-1213.
Make a Budget for Your Social Security Check Each Month
According to Kimberly Foss, certified financial planner and founder of Empyrion Wealth Management, the first thing retirees should do with their Social Security check is confirm they received the correct amount. After you’ve confirmed that your payment is correct, it’s time to properly budget it.
Before spending your Social Security checks, Bill Kearney, owner of Integrated Financial Concepts, recommends making a spending plan. Here’s how it works:
- Examine your projected monthly expenses, such as rent or mortgage payments, food, healthcare, debt, and other living expenses.
- Calculate expected income and where it will come from.
- Match your expenses to your anticipated income sources. In other words, calculate the difference between your Social Security payments and your pension or withdrawals from retirement accounts.
Keep an eye on your income.
You must keep track of your outside earnings if you want to maximize your Social Security benefits. If you are under the age of full retirement in 2021, your Social Security benefit will be reduced by $1 for every $2 you earn above $18,960. If you reach full retirement age in 2021, your benefit will be reduced by $1 for every $3 you earn above $50,520 until you reach full retirement age in the following month. There are no Social Security benefit reductions once you reach full retirement age.
Prioritize Your Basic Necessities
Then it’s time to divide your Social Security benefits. According to Leonard Hayduchok, CEO and president of Dedicated Financial Services, you should treat your Social Security check like a paycheck. Use the benefits to cover recurring expenses such as housing and groceries. According to the BLS survey, people 65 and older spend the following amounts per year on food and related housing expenses:
- $17,472 for housing
- $3,810 for utilities
- $6,599 for food
You should try to set aside 60 percent to 70 percent of your annual Social Security benefits to cover these costs, though this will be difficult for many retirees. If your annual benefits are equal to the national average of $1,615.81 per month or $19,389.72 per year, 60 percent of your Social Security check – which comes to $11,633.83 per year – will not be enough to cover the expenses listed above.
Still, it’s a good idea to put as much money as you can towards food and shelter. After all, these are your basic needs; without them, you will not be able to live well. Just keep in mind that once you’ve used your check to cover these basic expenses, you’ll most likely need to tap into your other sources of income to cover other expenses.
Retirees whose food and housing costs exceed their Social Security checks should look for ways to reduce these costs. One option is to relocate to a city where you can live comfortably on Social Security.
Use Your Social Security Checks to Pay for Medical Expenses
After you have budgeted for your basic needs, you should pay for your medical expenses. Assume you’ll spend close to the national healthcare cost average for Americans 65 and older, which the Bureau of Labor Statistics estimates at $6,833 per year. If you spend close to this amount, it’s a good idea to put the rest of your paycheck toward this expense. However, it is also critical to plan for rising healthcare costs that your Social Security checks will most likely not cover.
According to HealthView Insights’ 2019 Retirement Health Care Costs Report, the average 65-year-old couple who retired last year can expect to spend $12,052 per year on Medicare Parts B and D, as well as supplemental insurance. As you get older, the cost of living rises. The average 70-year-old couple will spend $16,068 on these items each year, the average 75-year-old couple will spend $21,706, and the average 80-year-old couple will spend $ 28,552.
Put whatever money you have left in your savings account.
After paying for necessities and healthcare, you may be left with only a few hundred dollars per year if you receive the average retirement benefit. So, what should you do with the money you have left over?
Edwin Cruz, the owner of Prosperity Financial Group, advises his clients to set aside 10% to 20% of their Social Security checks for the unexpected. He also suggests gradually increasing this amount until the retiree has saved enough for six to nine months of living expenses.
Following this strategy, and assuming you receive the average retirement benefit, you should aim to save at least $1,825.91 per year until you have six to nine months of emergency savings. However, because you’ve already used your Social Security checks to cover other high-priority expenses, you’ll most likely need to supplement your income to build an emergency fund.
Don’t Forget to File a Claim on Your Children’s Behalf
If you are claiming retirement, disability, or survivors benefits and have dependent children, you can also file a claim for them. A qualifying child can receive up to 50% of his or her parent’s full retirement or disability benefit, and up to 75% of the benefit of a deceased parent. However, there is a cap on the amount of money that can be paid to a family, with the maximum amount determined as part of each Social Security benefit calculation.
To be eligible, a child must be under the age of 18, between the ages of 18 and 19, and enrolled full-time in grade 12 or lower, or 18 or older with a disability that began before the age of 18. Although this is not your Social Security benefit, it is still a payment from the Social Security Administration that can help your family make ends meet.
Other Expenses That Your Social Security Benefits Probably Will Not Cover
Retirees must be careful about how they allocate their retirement funds to ensure that they can cover all of their expenses. In addition to basic necessities, healthcare, and savings, there will almost certainly be other expenses that your Social Security benefits will not cover. This is especially important to keep in mind if benefits are reduced in the future.
In retirement, for example, you will still have to pay taxes. Depending on your financial situation, you may be required to pay taxes on your Social Security benefits, making it even more difficult to cover retirement expenses. You’ll also need to budget for transportation and any vacations you intend to take.
Although Social Security may not be enough to cover all of your retirement expenses, you can still find ways to cut costs and generate income. You’ll increase your chances of having a comfortable retirement by doing so.