Despite frequent reminders, many ignore the need to save separately for retirement. An estimated 33% of Americans have no retirement savings, but more alarming is that 30% of those aged 55 and older are in the same predicament. Social Security is a major contributor to the fact that so few of us save.
The National Academy of Social Insurance estimates that about 25 percent of elderly Americans depend solely on Social Security.
Although Social Security helps many retirees maintain their financial stability, there is a significant risk in relying too much on it. And if we don’t start putting matters into our own hands, many of us risk falling short in retirement.
Can you survive only on Social Security?
The difficulty with relying only on Social Security payments is that they are only intended to replace roughly 40 percent of your pre-retirement income. This is not an informed guess; the Social Security Administration confirms it.
It is unlikely that your retirement living expenses will decrease to the point that you can exist only on Social Security. For one thing, you will have much more free time, meaning you may spend more on recreation and pleasure. But more crucially, you will have to worry about health care, an issue that throws so many seniors for a loop.
According to 2016 statistics from HealthView Services, a provider of software for healthcare cost forecasting, the average healthy 65-year-old couple retiring this year may anticipate incurring $377,000 in medical bills throughout their retirement.
Younger couples have it much worse. A healthy 55-year-old pair might spend up to $466,000 on healthcare expenditures throughout retirement, whereas a 45-year-old in similar health could rack up $592,000 in healthcare spending. And those are the statistics faced by healthy couples. If your health is poor, your charges may rise even further.
When viewed in this manner, Social Security will likely not be sufficient, especially considering that the average recipient presently receives $1,341 in monthly payments, or slightly over $16,000 annually. Even if you and your spouse each earn $16,000 per year in Social Security benefits for a total of $32,000, you end up spending $377,000 on medical bills throughout a 20-year retirement like the typical healthy older couple, that’s $18,850 per year. Subtracting this amount from $32,000 leaves you slightly over $13,000 yearly, or roughly $1,100 per month, to meet your remaining costs.
No matter how hard you try to reduce your living expenses, you cannot avoid essentials such as food, power, transportation, and shelter. The typical American paid $934 per month on rent in 2014. If you’re in a similar situation, relying exclusively on Social Security would leave you with less than $200 a month to meet the rest of your bills. And that is simply insufficient.
It’s time to begin saving.
If $16,000 per person per year in retirement does not sound sufficient, it is important to begin saving on your own while you still have the possibility. Even if retirement is fewer than ten years away, you still have time to accumulate money before you stop working. Anybody aged 50 or over may contribute up to $24,000 to a 401(k) and $6,500 annually to an IRA. If you cannot provide the maximum amount, do what you can. If your assets yield a somewhat cautious average annual return of 4%, saving $250 every month for ten years will provide you with an additional $36,000 in retirement.
If you are still in your 30s or 40s, your potential to catch up is much larger. If you save $250 each month for 20 years and get an average annual return of 8% on your assets, you will have $137,000 for retirement. This is a plausible assumption for younger, more risk-tolerant investors.
If you are already in your sixties and have not yet begun saving, you may want to consider delaying retirement and working for a few more years to save money. Some research indicates that working longer might contribute to a longer life, even though this may not be the optimal choice. Another choice? Work part-time to boost your Social Security income throughout retirement.
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