Every day, 10,000 Baby Boomers turn 65, the average age of retirement in America. Unfortunately, not all of them are able to retire. The biggest issue faced by retiring Boomers is money: they didn’t save enough of it pre-retirement and/or Social Security won’t cover enough post-retirement.
In 2016, Social Security paid out $905 billion to retirees, and while that may seem like an impressive number, the actual benefits paid out are somewhat less impressive. According to the Motley Fool, the biggest check a retiring 65-year-old can receive is $2,542.
Many of those close to retirement will be counting on Social Security to cover the majority of their expenses, but depending on your career before retirement, income level, previous investments, age and health, those benefits may not be enough.
What to Know About Social Security Benefits
The actual benefits received from Social Security vary based on a variety of factors, and those benefits may not cover everyone depending on the circumstances. Here are a few things every retiree should know.
Without Social Security, 40% of retirees would live in poverty
61% of all retirees count on Social Security to provide for them, and 33% rely on it for at least 90% or more of their annual income. But the benefits are progressive: the higher a worker’s pre-retirement income, the more benefits they will receive. But the percentage of income it will cover will be less than lower earners.
For example, a worker making $30,000 per year pre-retirement may only receive $1,250 in Social Security benefits, but that makes up nearly half of his or her pre-retirement income. The same person making $100,000, on the other hand, might receive closer to the benefit cap (approximately $2,500), but it would only make up around a third of their annual income.
In both scenarios, the benefits are still not enough to cover the same income level they had pre-retirement, but it does cover something. According to CBPP, more than 40% of those age 65 and older would live below the poverty line without Social Security.
While Social Security doesn’t cover all of your expenses, depending on your income level it will, at the very least, sustain you.
Benefit amounts depend on retirement age
Aside from pre-retirement income, Social Security also pays out different benefits based on when you file for them. The longer you wait to claim, the greater your maximum benefits will be.
But this also means waiting longer to retire in order to receive maximum benefits. For those with health concerns or other issues that might accelerate the retirement process and remove them from the workforce sooner than expected, that could be a problem.
The recommended age for retirement to receive the most benefits from Social Security is 70 years of age, but not everyone can or will want to wait that long to retire. Those looking to hang up their hats at 62, for example, will receive less of a payout than those who wait longer.
Social Security funds can be depleted
Of course, those who wait too long may find that they don’t have as many benefits as they thought.
According to the 2016 Annual Report by the Social Security and Medicare Boards of Trustees, some Social Security benefits may be depleted by 2028. This means that for every dollar paid into Social Security, only 75 cents is paid back after retirement.
There have been several solutions proposed over the years to combat this problem, including options to remove the payroll earnings tax cap, tax the rich at a higher rate or raise the retirement age. But none of these options are guaranteed to solve the problem in the long run and many come with additional drawbacks that can affect benefits.
Baby Boomers looking to retire in the next few years may find it easier to calculate (and receive) Social Security benefits than their younger counterparts, including Gen Xers and Millennials.
How to Plan If Social Security Isn’t Enough
So what does this all mean when it comes to planning for retirement? For starters, it means that if you do receive Social Security, you probably will be covered for some basic necessities (you probably won’t be destitute). But it also means that you won’t necessarily live the life you want.
Benefits only cover a certain amount, and fluctuate wildly depending on your income levels pre-retirement as well as when you retire (if you retire) and the economic standing of the program itself.
Thankfully there are a few things you can do to offset these drawbacks to ensure that you’re living the way you want to in your golden years.
Make sure you’re receiving the right amount
Kimberly Foss, certified financial planner and founder of Empyrion Wealth Management, says that the first thing retirees should do is confirm that they received the correct amount. Knowing how much you should receive before you start collecting Social Security can help protect you against under or over-payments (which would need to be repaid later on). Head over to the Social Security website to check your estimated benefits.
Plan carefully and stick to your budget
While many retirees dream of traveling the world or spending their days carefree with family, it can be extremely easy to outspend your budget if you’re not careful. Taking the time before and during retirement to budget for expenses and save money will help alleviate any headaches caused by unexpected events or a sudden change in income levels should it occur.
Have a backup for medical expenses
According to CNBC, the average woman will spend an estimated 70% of her Social Security check on health care, while the average man will use nearly half of his benefits to cover medical expenses. The National Council on Aging approximates that 92% of older adults have at least one chronic disease, and 77% have at least two. Having a plan to cover expected and unexpected costs will help alleviate the burden should health issues become a barrier.
Generate supplementary income
Supplementing your income from additional sources, such as cash flow investing or even a part-time job can make all the difference. Considering that Social Security will never cover 100% of your pre-retirement income, having additional income to offset any expenses (or to simply take that long vacation you’ve been waiting for) will significantly improve your situation when it comes time to retire.
Final Thoughts
It’s never easy to estimate how much you will need in retirement to truly thrive (and not just survive), but understanding how much will be covered by Social Security can help you plan out your budget accordingly.
Know that Social Security will cover some basic necessities, and depending on your pre-retirement income as well as the age you retire, you can expect to receive at least a portion of that income to live off of.
But that doesn’t mean Social Security will cover everything, especially if you encounter hiccups over the years, like unexpected medical bills that may eat away at your budget.
Your best bet is to plan for Social Security to be a part of your overall income and find ways to supplement that income with other methods, like cash flow investing.
