President Roosevelt signed The Social Security Act into law in 1935. It created a social insurance program intended to pay retired workers over age 65 income after retirement. Yet, in 1935, the life expectancy was nowhere near what it is today. In 1940, the average life expectancy was 63. The government didn’t even expect you to reach 65! Today, the average life expectancy is over 77 years old. You can claim your benefits into ripe old age, but don’t get too excited. It won’t support you.
Social security is a supplement. Unless you have practically no living expenses, social security cannot be your sole source of income. The average monthly benefit is around $1,200, so can you make it work on less than $15,000 per year?? This equates to about the same as a minimum wage job.
Oops! I forgot. That’s before any Medicare premiums are deducted, which takes around $300 from your check.
Low (or no) wage years can decrease benefits. Because social security is based on your highest 35 years of income, if you retire early or have a year or two of unemployment, your benefits will be averaged down. If you start work at age 20 and work straight through to 55, good for you, but there are two problems. Number one – if you stop working at 55, your low earning years of your 20s will keep benefits pretty meager. Number two – the earliest you can claim is at age 62, but your benefits will be cut 25%. Even then, that’s seven years straight living off of what you’ve built up thus far.
How much do you need for retirement? The most common rule of thumb is the 4% rule. It’s basically that retirees can spend 4% of their portfolio in the first year of retirement, adjust for inflation and be reasonably assured that the nest egg will last for thirty years.
The average household spends around 50K per year. Assuming you’re dead-on average, you’ll need almost $1 million just to keep up with your current lifestyle. “Hold up, hold up,” you say, “I’ll have my house paid off and the kids out of the house – my expenses won’t be the same.”
Not so fast… increased out-of-pocket medical costs and “retirement habits” (such as traveling) will quickly take up the space from your budget reductions. I’m already assuming that some expenses will be eliminated, but others will take their place.
The Employee Benefit Research institute also points out that Social Security provides on average only 40% of the income needs of persons 65 and older. This is a wake-up call for pre-retirees, no matter how young, to examine their needs and financial situation. It is critical to get a nest egg together and devise a plan that will make your golden years truly golden.
One of the best retirement books I have ever read is "The Five Years Before You Retire" by Emily Birken. Even if you're more than five years away, it's still important to to know this information so you're prepared when the time comes. It's on Kindle Unlimited, so if you have an unlimited account, you can read it for free.