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With longer life expectancies and increasing living costs, the average worker anticipates needing $1.8 million for retirement, as per a recent Schwab study. However, numerous individuals find it challenging to amass nest eggs of such magnitude during their working years.
While Social Security benefits can provide some support, it’s crucial to grasp their actual coverage of a retiree’s expenses. Here, we’ll examine the extent to which these benefits currently address typical retiree expenses and explore strategies for those concerned about potential shortfalls in meeting their financial needs.
What constitutes a normal retirement?
Retirement varies from person to person, but two certainties remain: it requires financial resources and has a finite duration. Presently, the average retirement age in the U.S. stands around 66, according to recent Gallup data. On average, a 66-year-old male can anticipate another 18.5 years of life, while a female counterpart can expect around 21 years more. For simplicity, let’s consider an average retirement span of 20 years.
Based on data from the Bureau of Labor Statistics, households headed by individuals aged 65 or older spent $57,818 in 2022. Though this is the latest available government data, inflation has likely elevated expenses since then, so let’s round it to $60,000 annually.
Thus, a 20-year retirement with yearly expenses of $60,000 gives an estimated total retirement cost of $1.2 million. However, these calculations pertain to current retirees and don’t factor in inflation or unforeseen costs, which could necessitate a higher retirement fund. Hence, an estimate of $1.8 million for retirement expenses appears reasonable.
What portion of your costs will Social Security pay for?
As of February 2024, the average monthly Social Security benefit stands at approximately $1,911, equating to nearly $23,000 annually. Over a 20-year retirement period, this would accumulate to about $458,640 in benefits, without considering annual cost-of-living adjustments (COLAs). Even with COLAs factored in, this sum falls significantly short of the estimated $1.8 million needed for retirement.
Certain households may receive higher benefits. For instance, married couples may have two retirement benefits or one retirement benefit and a spousal benefit. If both spouses qualify for a $1,911 monthly check, Social Security would provide the couple with over $917,000 throughout a 20-year retirement. Nevertheless, this still leaves a substantial portion of retirement expenses to be covered independently.
Moreover, there’s uncertainty regarding the future of Social Security. The program’s trust funds, which bridge the gap between annual wage taxes and outgoing benefits, are depleting. Without new legislation to bolster the program’s financial health, benefit cuts could be imminent within a decade. Such cuts would exacerbate the challenge for seniors to meet their needs solely with Social Security benefits.
What actions are appropriate for seniors?
It’s important to acknowledge that Social Security was never intended to cover all retirement expenses. Ideally, individuals should have personal savings in retirement accounts and investments to supplement their Social Security benefits. However, many people find it challenging to save money after meeting their monthly obligations.
One alternative is to work longer or pursue a phased retirement, gradually reducing work hours instead of transitioning directly from full-time work to full retirement. These approaches provide longer access to steady income while allowing investments more time to grow before being tapped into.
Some seniors may qualify for additional benefits such as Supplemental Security Income (SSI), which provides additional monthly support. For 2024, the average single adult eligible for SSI could receive up to $943 per month, while the average qualifying married couple could receive up to $1,415 per month.
Another strategy is to reduce retirement expenses more than initially planned, although relying solely on this approach may not be wise due to the unpredictability of future expenses. A combination of these strategies is often recommended to help cover expenses beyond what Social Security provides.