If you were to ask a thousand people what their ideal retirement looks like, you would likely get hundreds of different answers. However, I’m sure the one thing everyone would agree on is that being financially worry-free is the goal.

Social Security plays a large role in many people’s retirement finances, but treating it as the only source of income could be a recipe for hardship. Here’s why banking entirely on Social Security might not be the smartest bet if you can avoid it.

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Deciding how much you’ll need monthly

It’s hard to say how much you’ll need monthly in retirement, but the 80% rule is a good baseline.

The 80% rule says you should be able to replace 80% of your last working year’s income in retirement to maintain your lifestyle. For example, if you make $100,000 in your last year working, you would aim for $80,000 annually (around $6,666 monthly) in retirement.

You should adjust the percentage accordingly if you plan to upgrade or downgrade your lifestyle. Do you plan to spend more money traveling? You may want to up the percentage. Plan to spend your well-earned leisure time doing absolutely nothing? You could likely lower the percentage.

How much can you expect from Social Security?

Social Security calculates your benefits by taking a percentage of your average income during the 35 years when your income was highest, adjusted for inflation. There’s a cap (called the wage base limit) on how much income is taxed and considered in Social Security calculations.

For 2023, the wage base limit is $160,200, so no Social Security taxes are paid on any income earned in excess of that. Each year, the wage base limit is adjusted for inflation (it was $147,000 in 2022), so you would need to earn the inflation-adjusted equivalent of $160,200 for at least 35 years to receive the maximum benefit.

The maximum monthly Social Security benefit you can earn depends on when you retire:

  • Age 62: $2,572
  • Full retirement age: $3,627
  • Age 70: $4,555

Even if you receive the maximum monthly benefit (which the vast majority of people don’t), you will only receive around $30,800, $43,500, or $54,660 annually, respectively, based on the three retirement ages given above. Assuming we follow the 80% rule, those annual benefits will only be ideal for people earning around $38,000, $54,375, or $68,325, respectively, in their final year of work.

Those are the best-case scenarios, too. The average monthly benefit for retired workers as of March 2023 was $1,833, which would only be ideal for someone making around $27,500 just before retiring.

Find out how much you’ll be receiving in Social Security

You should check your earnings record to get an idea of how much you’ll be receiving from Social Security.

The best way to do so is by visiting the Social Security website and creating an account if you don’t already have one. Once you do so, you can find your earnings record, which shows you your projected monthly benefit based on when you decide to claim it (early, at full retirement age, or later).

You always want to have a rough idea of how much you’ll need monthly in retirement, so you can see if there’s a gap between that and your projected Social Security benefit. There’s a good chance there will be.

Work on supplemental sources of retirement income

The goal is to approach retirement savings from multiple angles using available retirement accounts. A 401(k) is offered through your employer and is by far the most popular type of retirement account. It allows you to contribute pre-tax money from your paycheck, lowering your taxable income and saving money on taxes. 

IRAs are like brokerage accounts designed to help you save and invest for retirement. The tax benefit depends on whether you’re using a Roth or traditional IRA. With a Roth IRA, you contribute after-tax money and take tax-free withdrawals in retirement. Contributions to a traditional IRA might be tax deductible, depending on factors like income and filing status.

Choosing between a Roth and traditional IRA comes down to your current versus projected tax bracket. If your tax bracket in retirement will likely be higher, it makes sense to go with a Roth IRA so you can pay taxes now at a lower rate. If your tax bracket will likely be lower in retirement, you should go with a traditional IRA to pay taxes later at a lower rate.

Using retirement accounts is a win-win: You receive a tax break as well as put yourself in a better financial position in retirement. Even small, consistent investments can make a noticeable impact over time and ensure you can have the retirement you envision.

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