If you’re wondering how much money is needed to retire, you’ll have to figure out how much you’re going to get from social security and then add in any other forms of income you may have, like savings. The amount of money you’re going to need to start saving now for retirement is dependent upon how much money you’ll be getting from social security and other forms of retirement income.
It used to be that Americans could depend on their social security to provide them with about 50% of their income upon retirement. This is no longer so. If you’re right behind the current “Baby Boomers,” your social security benefit is unlikely to provide you with more than 25% of your needed income upon retirement. This makes a big difference when you have to start thinking about how much to save for retirement.
If you think that you can make it on the amount you’ll be receiving, between Social Security and your pension (let’s say $20K), then you don’t need to worry about saving much now. But, if you’re hoping to have $120K per year once you retire, then you’re going to have to start to put away lots of money. The difference between the $20K and the $120K is what you need to come up with.
How Does Social Security Work?
Social Security is not a fund that’s supported by money in the bank. When young workers have money taken from their paychecks and put into social security, this money is given to people who are no longer working. Today, it takes about three workers to provide enough funds to provide Social Security for one retiree. Forty years from now that ratio is going to drop to two workers paying the Social Security of one retiree. This ratio is simply not going to provide enough money to pay for that retiree’s Social Security unless it’s accompanied by an increase in taxes.
What Happens to Social Security after it’s Deducted from Your Paycheck?
Today, money that is garnered through Social Security tax is put into Treasury bonds. Unless the Social Security system is changed, studies show that there will be no more surplus income by the year 2041. Bonds will have been depleted and the benefits that retirees expect to be paid will be down to about 78% of the numbers on the schedule of benefits. This means that when 2041 rolls around, that today’s 35 year old worker should be expecting to get 22% less than what he or she is looking forward to getting when they retire in 2041 and that there will be reductions in benefits every year after 2041. That’s a scary prospect.
Lucky you! This means that you’ve gotten Social Security ahead of the Baby Boomers and you can expect a better amount from Social Security than those who haven’t yet retired. If retirement is in your future, it’s best not to think about leaning too heavily on your Social Security benefits as your main source of income.
Changes in the Age at Which You Can Collect Social Security
Changes have already been made, by the government, to the age at which full Social Security can be collected.
- Full retirement age is 65 for those born prior to 1938.
- Full retirement age is 67 for those born after 1960, reflecting changes in life expectancy
You can start getting your benefits at 62 but your benefit checks will be smaller than those you’ll receive if you wait to collect until you’re 67.
So what’s the Government to Do About Social Security?
Well, there are a few options: the government could lower benefits, increase taxes, increase qualifications, devalue benefits through inflation, or combine all of these options.
No matter what does happen to Social Security, those who plan to retire in the future should not depend on Social Security to provide most of their retirement funding. This means that today’s workers must put more aside themselves to provide for their futures. Make sure that you have savings and, if possible, a 401 (k) sponsored by your employer to supplement your social security.
What Can You Do to Provide for Yourself in Retirement?
Since depending on Social Security to support yourself in your retirement is a risky business, here are some ways to enhance your retirement income planning and to either replace, or to supplement, your Social Security benefits:
- Plan on staying in the workforce longer: A couple of more years can make a noticeable difference in your benefits upon retirement. Plus, you’ll have more time to save, make interest on your savings, and less time to spend your savings if you’re still working.
- Increase the amount of money you set aside for retirement: the more money you have in the bank, the more you’ll have to spend upon retirement, and the more interest that savings will accrue.
- Plan on spending less: if you develop a habit of spending less now, you’ll not only have more to put away for retirement, but you will have developed some good habits to use when your paychecks stop coming.
- Maintain and improve your health: Good eating habits and regular exercise with the addition of enough sleep and a lower stress lifestyle can improve your quality of life now and in the future. It may give you more years to spend in retirement and may even lower doctor’s costs and the number of prescriptions you’ll need as you age.
- Be sure to insure: Do what you can to provide yourself with good health insurance. Medical bills can decimate savings. Look into insurance for long-term care. Long-term care can also cost you most of your savings, should you need it.
While you may have hoped that Social Security would provide for most of your future needs, don’t be too disappointed. It’s never too late to do something about your future finances. Look at the steps above and implement them for a happy and healthy financial future!
Don’t get out the old retirement calculator, until you review the statement your receive every year from Social Security, go to the Social Security website at www.ssa.gov, or call the Social Security office at 800-772-1213 to find out what kind of benefit you should expect to receive when you retire.
Mark T. Harris is a lifelong fan of money (he started his first savings account at 13!) and loves to surf the Web. He is retired, loves to travel, and lives in Austin, Texas with his wife and two grown children.