How Much will Your Retirement Rely on Social Security?

Written by Jim White, CFP®, EA

The Social Security Administration (SSA) assumes your Social Security benefit will only replace 30% of your annual pre-retirement earnings. Even the SSA tells you to get your butt moving and save for retirement. Let that sink in. Social Security will only replace 30% of your annual pre-retirement earnings. Is that good, bad, or accurate? What does that mean to you?

How do they come up with 30%?

It’s based on the average pre-retirement income of all American workers, which, according to the National Academy of Social Insurance, is approximately $44,000. Therefore, the amount of income replaced by Social Security is lower for those with higher incomes and higher for those with lower incomes.

Social Security Statements

Did you know the SSA now only sends statements to people 60 and over who are not getting benefits and don’t have an account on the Social Security website? Go online, sign up at ssa.gov, and check your annual statement to see what benefits you are entitled to at various retirement ages.

Please don’t forget to review your statements annually to keep track of your benefits and ensure there are no mistakes.

How much pre-retirement income do you need in retirement?

To know how much of retirement will be funded by Social Security, you need to know how much you need! The SSA says they have, on average, 40% of your pre-retirement income covered. The biggest question is, how much of your pre-retirement income will you need in retirement?

If you have perused any popular financial magazines in any given month, you may see articles recommending that you need anywhere from 70% – 100% of your pre-retirement income during retirement. That’s a wide range. A difference of 10% has an enormous impact on your retirement.

Get to work to determine retirement needs

The first thing to do is check our blog on improving your cash flow. Understanding your income versus your expenses, and yes, that means creating a budget, will get you in the ballpark. Analyzing your cash flow is a great start to figuring out how much you will need in retirement.

Don’t forget there are a few expenses you won’t have in retirement. You will no longer be paying Social Security and Medicare withholding if you have no earned income. How much are you contributing to your retirement plan? That expense goes away in retirement as well. Combined, they may be a nice chunk of change.

You may assume that gas, clothing, and lunch expenses will decrease when you retire. I find that’s typically not the case. You’ll not live like a hermit and not go anywhere in retirement. You’ll be going places, visiting family and friends, and spending time on hobbies. I call that a wash and don’t assume any decrease.

“How much you’ll spend in retirement is just as important as the amount you need to save for retirement.”

By budgeting and planning, you should have a solid grasp of your retirement needs. And don’t think this is an exercise you should do when you’re 60. Like saving for retirement, the earlier you start your retirement spending plan, the better off you’ll be. So get started now. The earlier you start and the longer you keep up with your budget, the easier it will be to see how much income you’ll need in retirement.

Buckets, streams, and ingredients, oh my!

I’ve heard all kinds of analogies to describe the different retirement income sources: buckets of income, income streams, and income ingredients for your retirement pie. Feel free to comment below and share your favorite analogy.

It doesn’t matter what you call them, but you need to figure out how to fund the portion of your retirement that Social Security doesn’t cover. The majority of your income will come from your retirement plans. If you’re lucky, your company still offers a pension. Do you have an annuity, a brokerage account, or a Roth IRA? Where you save for retirement largely depends on your situation.

All possible sources, streams, or buckets of retirement income are put into the retirement plan. Calculations are done by estimating your income needs versus the return on each investment to determine if your resources will fully fund your retirement. Again, the earlier you start this process, review it annually, and track your progress, the better off you’ll be.

You need to act and create a retirement savings plan within your budget.

You know what you must do;