How Much Do You Need to Live on Social Security? - dummies

How Much Do You Need to Live on Social Security?

By Jonathan Peterson

Copyright © 2015 AARP

Social Security is just one part of your financial well‐being. It is not meant to replace most of your preretirement income. (It covers roughly 40 percent for typical earners; less for the more affluent.) It was never meant to pay for an upscale lifestyle on its own.

[Credit: ©]
Credit: ©

You can get a sense of your future benefits by reviewing a recent Social Security statement, if you have one, or by checking out Social Security’s online tools and plugging in your information.

The future may seem hazy, but basic questions are clear. You can begin to imagine the next phase of your life by considering the following:

  • Where will you live? Consider how important your community roots are, the costs of your region, and if you have family support nearby. If you want to relocate, you can’t wait forever.

  • How long will you live? The longer you survive, the more resources you need.

  • How long will you work? If you have the option to continue working, a few extra years of work can provide a big boost to retirement security.

  • What are your spending needs? Do you expect to spend more for some things and less for others?

Figuring out how much money you need

Envisioning your retirement is a chance to look at things freshly and creatively — but with a dose of reality. Here are some ideas to get the process rolling:

  • Follow the money. Review several months or a year of checking account and credit card statements to see where the money goes.

  • Look at your priorities. How do you feel about where your money is going? Does your spending reflect your priorities?

  • Visualize being older. Some experts believe a 65‐year‐old couple should set aside more than $200,000 for future healthcare costs. You should also have an emergency fund large enough to cover three to six months of expenses.

  • Write a budget. On the income side, add up Social Security, any pension, expected earnings, and annual savings withdrawals, such as from a 401(k) or IRA.

Determining how much income you need

Financial planners often say that your retirement income should replace 70 percent to 85 percent of your working income to keep up the lifestyle you’re used to. That’s just a rule of thumb, though. You may need more, or you may be able to get by with less. You don’t have to pick a percentage. You can build a spending plan from scratch.

When you retire, you say farewell to certain expenses. You don’t pay for commuting. You may buy fewer clothes. You may already have paid off the house and helped the kids through college. You’re no longer setting aside money for retirement, such as in a 401(k) plan — now you’re living off those savings.

You’re an individual, not a rule of thumb. In projecting future income needs, ask yourself what’s distinct about your own personal situation.

Narrowing the gap between too little income and too much spending

Here are seven things you can do now to help your Social Security benefit (and other fixed income) stretch farther tomorrow:

  • Save more. If your employer offers a 401(k) plan, try to make the maximum contribution. If your employer offers another payroll savings plan, such as into a credit union, try to save there, as well. If you’re over 50, try to make the extra catch‐up contributions allowed for IRAs and 401(k)s. See if your bank will make monthly transfers from your checking to your savings account.

  • Tackle debt. Debt undermines your economic security in retirement, so you want to get a handle on it now. Can you pay off your mortgage? What about credit cards?

    If you’re in over your head, get help. You can contact the National Foundation for Credit Counseling at 800‐388‐2227.

  • Watch healthcare costs. Choose health plans with care. If your employer’s plan offers a choice of deductibles, think carefully about which option makes the most sense. Before you schedule a medical test, find out if your insurer expects you to wait a certain length of time before taking it. Look for savings on prescription drug costs, such as through generics. Also, find out if your insurer offers a cheaper, mail‐order system for medications.

  • Pay with cash. The more you whip out a credit card, the easier it is to pile up unnecessary expenses. For many people, it’s just a bit harder to hand over the actual cash in your wallet. If you do seek the convenience of plastic, try to make more purchases with a debit card, which comes straight out of your bank account, rather than a credit card, which may lead to hefty interest charges.

  • Review routine charges. Some companies lure you in with cheap rates and then ratchet them up later. Check your monthly cable and Internet plan to make sure you’re getting the best price you qualify for. Find out if your bank is charging fees for services it used to offer for free. Compare what you pay for auto and home insurance with other offers. Ask your insurance agent if you can make modest changes to coverage that will lower your rates.

  • Save energy. Waste adds up. Fix drafty windows and doors with weather stripping. Improve insulation wherever it’s needed, including the attic, doors, and windows. Seal leaking ductwork. Watch where you set the thermostat in winter and summer — a few degrees can make a difference. Ceiling fans are a cheap way to cool things down in the summer. When you can, use the microwave rather than the stove. Turn off appliances when not in use.

  • Spend for value. Do you still take your seven‐year‐old car to the dealer for routine maintenance? Look for a cheaper mechanic. Still use a travel agent? Try to book your own flights and hotels. Do you dine out frequently? Make use of online discounts. Be aware of bargains.