Many retirees rely primarily on Social Security for income, but that doesn’t mean it’s enough.
To prevent a retirement crisis, ask yourself a few pointed questions.
How Much Income Will You Need in Retirement?
Retirement experts agree that you should assume you’ll need 70-80% of your pre-retirement income to live comfortably in retirement. But that’s just a rough guideline.
Projecting your income needs is tricky because it depends on so many variables. The estimate that you’ll only need about three-quarters of your pre-retirement income is based on some assumptions that may not be true in your case.
True, you won’t have work-related expenses like commuting anymore, and maybe your mortgage will be paid off. But health care expenses are rising. And what if you want to travel or spend money on a hobby or passion? You may not want to cut back on your lifestyle.
And then, there’s inflation. Goods and services are likely to get more expensive over time.
How Are Social Security Benefits Calculated?
Benefits are calculated on the average of your 35 highest-earning years. If your average annual income is $65,000, you can expect an annual benefit of about $30,000. Living comfortably on that may mean cutting back on your quality of living—a retirement crisis.
Even if you’re a high wage earner, that doesn’t necessarily increase what you bring in from Social Security. Benefits are capped at a certain dollar amount each year.
In fact, Social Security was never meant to replace your pre-retirement earnings. According to the Social Security Administration, Social Security compensates for about 40% of an average wage earner’s income.
As more and more Americans are approaching retirement, experts agree that Social Security is unsustainable in its current form. Hence, many will face a retirement crisis—not enough income to pay the bills.
What to Do If Your Social Security Benefits Are Not Enough?
Unless you’re very wealthy, your options boil down to a few strategies.
Lower Your Expectations (and Your Standard of Living)
The most obvious is to try to live cheaper. Maybe you can move to someplace like Belize and live comfortably on $20,000 a year. Or you could downsize your home and streamline your expenses. Getting rid of credit card debt, cutting down on bills, transportation, food and selling the second car may be reasonable choices as well.
However, like many others, you may want to stay close to family and friends and keep on doing the things we love, like travel, hobbies, and entertaining. To do that, you need to have savings.
Make a Plan to Increase Your Savings
If you have a good work retirement plan, congratulations. But even if you have one, low interest rates and the uncertainty of the stock market may mean your savings will not keep up with your needs. You need to increase your savings—a good guide is 10% of your income.
To figure out how much savings you’ll need to carry you through retirement, begin with calculating 80% of your current income. Then, subtract your annual Social Security benefit from the retirement income you’ll need. Divide the answer by .04 (you should only draw 4% of your savings each year to keep from running out of money). And that’s how much you have to have saved up.
Supplement Your Income with a Part-Time Job
When the country is at or near full employment, working part-time or keeping your job longer may be a sensible and do-able solution. But there will probably come a time when you really don’t feel like working anymore.
A home-based business may be the answer, if you have an interest, a skill set, or experience that you can provide, and if you have the energy and desire to do your own thing. Starting a new business before you retire will give you a leg up.
For ideas about starting a home-based business, check out the 8 Figure Dream Lifestyle blog.
Avoid the Retirement Crisis: Plan Ahead
The best way to prevent your own personal retirement crisis is to save and invest now and think of your Social Security benefit as a bonus, not your mainstay. Moreover, start working on ways to increase your retirement income and look into starting a home-based business after retirement.
With good planning, you can have a comfortable retirement. But don’t count on Social Security to do it all!