Why Social Security May Not Be Enough to Allow You to Live Comfortably in Retirement

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Americans enjoy tremendous benefits from Social Security. You pay Social Security taxes throughout your career, and upon retirement, you become eligible to begin receiving monthly payments. These payments form the basis of some retirees’ retirement income. However, for many people, these benefits may not be sufficient to live comfortably in retirement.

Social Security Benefits

 

THE AMOUNT THAT YOU WILL REQUIRE IN RETIREMENT

Regrettably, there is no definitive answer to how much money an individual will require in retirement; different lifestyles will inevitably necessitate different amounts. However, you can use sound principles of thumb to assist in determining an approximate amount. To begin, it’s helpful to review the 80 percent rule, which states that you should aim to maintain your current lifestyle in retirement with 80 percent of your pre-retirement annual income. Therefore, if your current income is $80,000, you should aim for an annual income of $64,000 in retirement.

Following that, you can apply the 4% rule, which states that you should withdraw 4% of your retirement savings each year (adjusted for inflation) without fear of outliving your savings. To determine your ideal retirement savings amount based on the 4% rule, multiply 25 by the annual income required in retirement. If you require $64,000 per year in retirement, multiply that by 25 to arrive at $1.6 million.

 

WHY SOCIAL SECURITY ALONE MAY BE INSUFFICIENT

The amount of Social Security you receive in retirement is highly dependent on your retirement age. Your birth year will determine what

Social Security considers to be your full retirement age. The following table summarizes the full retirement ages for individuals based on their birth year:

You can begin receiving Social Security benefits at age 62 or defer them until age 70, which increases your monthly benefit amount. The maximum monthly benefit is $3,345 if you retire at full retirement age in 2022; $2,364 if you retire at age 62 in 2022; and $4,194 if you delay benefits until age 70.

Even if you delayed benefits until age 70 and received the maximum amount, you would receive slightly more than $50,000 annually. According to the 80 percent rule, this amount is only appropriate for those earning $62,500 per year. If you retired at age 62 and received the maximum amount, you would receive slightly more than $28,000 per year, which is only optimal for those earning more than $35,000.

While even the maximum payouts are unfavorable for those with higher incomes, the situation becomes even worse when you consider that the majority of people will not receive the maximum payout. As of March 2022, over 47.6 million people were receiving Social Security retirement benefits, with an average monthly benefit of just $1,665 — just under $20,000 annually. At these rates, many people will struggle to maintain a comfortable standard of living in retirement solely on the basis of their Social Security benefits.

 

IF YOU RETIRE EARLY, YOUR BENEFITS WILL BE REDUCED.

Assume you choose to retire early and begin receiving Social Security benefits at the age of 62, rather than waiting until you reach full retirement age. In that case, your monthly benefits will be reduced proportionately to your distance from full retirement age. Benefits are reduced by five-ninths of one percent per month for the first 36 months before reaching full retirement age. If you retire more than 36 months before reaching full retirement age, each month beyond 36 reduces your benefits by five-twelfths of 1%.

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Fortunately for many people, Social Security is not their only source of income in retirement. Numerous individuals will also have a 401(k) and, for some, a Roth IRA or traditional IRA. While planning for retirement, it’s critical to be aware of and utilize the various retirement accounts available to you. Having multiple streams of income during retirement is one way to ensure financial security and the ability to live the life you’ve imagined.

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