What will retirement look like for those trying to live on just Social Security Benefits?
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There are people out there who can survive on Social Security alone. Maybe they have always been living on a small income. Perhaps they have paid off a home or have other ways to live frugally. For the rest of us, even the maximum Social Security check could make it tough to survive comfortably in most cities. If you are a high earner, you will likely struggle financially if you attempt to live on Social Security alone in retirement.
It is not that surprising to me that more than a quarter of people aged 50 and older think that they can live comfortably on Social Security alone once they enter retirement. This is according to a survey from Nationwide Insurance. This misperception could lead to disastrous results for their standard of living in retirement.
Was Social Security Meant to Fully Fund Your Retirement?
In case you were wondering, Social Security was never meant to be the only source of income for people in retirement. For much of this valuable benefit’s history, many workers also had a pension. Likewise, people used to not live as long. They also had more moderate standards of living and medical costs, in retirement, were not so outrageous.
What Is the Average Social Security Check Amount?
The average Social Security check is expected to be around $1,540, per month, in 2021. The Nationwide survey polled people aged fifty, or older, with household incomes above $150,000. According to the Social Security Administration, the benefit will only replace around 27% of high earners’ wages. Of course, the more you make, the less of a retirement income replacement Social Security will provide.
Assuming you begin receiving Social Security benefits at your full retirement age (currently 66), the maximum benefit you could receive is $3,011, per month. Annualized, that is around $36,132 and translates into, at most, 24% of the pre-retirement income of someone making $150,000, or more, per year. Even if this was a dual-income household, and both earners received the maximum Social Security benefit, you would only be replacing 48% of your household pre-retirement income. To be real, if you are both getting the maximum Social Security benefit, your income is likely closer to $275,000 (or more) in 2020.
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To make up the gap, you could work until age 70, which could help increase your maximum Social Security benefit to around $3,790, per month. Or, more likely, you would need to derive retirement income from other sources like a 401(k), IRA, or even Defined Benefit Pension Plan.
Does Waiting Until 70 To Collect Social Security Help?
Let’s assume the higher-earning spouse waits until 70 to collect Social Security and gets a maximum of $3,790, per month. The lower-earning spouse receives the maximum spousal benefit at 50%, which equals $1,895, per month, for a grand total of $5,685. For the average American, that is a nice monthly income but still well short of the minimum $150,000 yearly income the high earning couples were living off before retirement. Roughly, they would want to have a nest egg of around $2 million to generate the remaining $81,780 to match their pre-retirement income. Exact numbers will depend on how the assets are held and other tax breaks the household may have.
While there are people out there who can make it work retiring on Social Security, they are likely living an extremely frugal lifestyle. They also likely have a paid-off home or some other type of subsidized housing. The average Social Security check would not pay the average cost of renting a one-bedroom in a city like Los Angeles.
Take steps today to prepare for your dream retirement where you are not trying to survive on Social Security alone. Ideally, you would be able to accumulate a nest egg to provide a retirement income equal to or greater than your pre-retirement income. Even if you are starting late, you are not alone. There is still time to improve your financial security in retirement.
