Saving for retirement is a no-brainer for many individuals. However, not everyone adheres to this school of thought.
Some individuals view retirement savings as a luxury rather than a need. What’s the reason? They believe they can rely on Social Security instead.
Social Security may pay you a sizeable payment if you leave the job market. But would it be sufficient to maintain you throughout retirement? The answer is probably not.
WHAT ARE THE EXPECTATIONS OF SOCIAL SECURITY?
It is a common misconception that once you become eligible for Social Security, your monthly payment will completely replace your old income. Your monthly Social Security benefit would replace around 40 percent of your prior income if you earned an average pay. And if you make more, you may anticipate an even less proportion of replacement income.
The current rate of income received from social security relies on the fact that congress will not reduce benefits in the future. Currently, this is a distinct possibility. In just over a decade, Social Security’s trust funds are expected to run out. If lawmakers do not find a way to intervene, the program may be forced to reduce payouts across the board.
But let’s be positive and suppose that benefits are not decreased (it is normally in the best interest of politicians to avert the widespread senior poverty catastrophe that would result if this were to occur). Nevertheless, if you rely only on Social Security in retirement, you may expect to get 40% or less of your previous income. And that is likely not enough money to survive.
A senior citizen’s average monthly Social Security payment is currently $1,681. After next year’s substantial 8.7% cost-of-living adjustment goes into effect, the average payout is projected to grow to $1,827 in 2023. Nevertheless, a monthly payout of $1,827 equates to a yearly income of under $22,000. If this does not sound like a sufficient annual income, you may need to reconsider your retirement savings strategy and increase your contributions.
Setting aside funds for IRA or 401(k) contributions is difficult when life’s various expenditures get in the way. If Social Security is the only source of income you can rely on in retirement, you may find yourself cash-strapped and dissatisfied.
Small savings contributions may go a long way.
Developing a substantial nest egg does not require much money each month. Investing $300 a month for 30 years in an IRA or 401(k) will yield approximately $408,000, assuming an average annual return of 8% (about the same as the stock market average for 30 years).
Additionally, you can make catch-up contributions to your 401(k) and IRAs when you get older. These catch-up payments are increasing in 2023 to allow you to grow your nest egg.
You may take action to maximize your Social Security benefits and receive a greater monthly payment than the average senior. But if you want to avoid financial difficulties in retirement, your best strategy is to construct a nest egg to complement your Social Security income.