Can One Retire Relying Solely on Social Security Benefits in 2024?
Are you planning to retire soon but haven't set aside any funds for your golden years? Don't count it out just yet. Though Social Security wasn't meant to be the sole source of income for retirees, most individuals will be eligible for some benefits when the time comes.
The question is, can Social Security alone sustain even a modest lifestyle in retirement, considering today's living expenses?
Probably not.
Shocking figures
This isn't intended to be disheartening, but the average monthly Social Security benefit retirees receive this year is just over $1,900, or approximately $22,800 yearly. This is a significant difference from the $72,967 the U.S. Census Bureau claims the typical household spent in 2022 on essentials such as food, clothing, and housing.
Keep both figures in perspective. The typical monthly Social Security payment refers to one retiree's benefit, but there could be two retirees residing in a household. Similarly, the average household expenditure might overstate the needs of households with two or more retirees, as these families have higher spending requirements compared to smaller households. When retired, you are more likely to own your home, which tends to lower your financial obligations.
However, managing all expenses with a $1,900 monthly income in retirement is a long shot, even when you live frugally.
Interestingly, the Census Bureau reports that around half of all people aged 55-66 in the United States have no retirement savings to their name. The Federal Reserve corroborates this finding. It's evident that many retirees are attempting to get by with just Social Security or will soon have to.
But there's hope if you haven't saved enough - or any amount - for retirement on your own.
Closing the gap
Don't despair! Making wise decisions when panicked is not your forte. Instead, take some time to contemplate your options before making a move that helps bridge the gap between your current savings and your financial needs.
There are essentially two types of individuals in this predicament: Those who are already retired and receiving benefits and those who are not but will soon be.
If you've started collecting your Social Security retirement benefits, you have the option to suspend them and restart them later at a higher rate (provided you've initiated benefits within the past 12 months and repay any benefits received).
This requires you to come up with a substantial sum of money in advance and find another source of income until you restart your benefits. This might be difficult for someone relying solely on their Social Security payments.
A more feasible solution for most Social Security beneficiaries is to continue working, which may not be what every retiree desires. But if it comes down to falling into debt or losing your home, earning income from a job clearly makes sense. This includes starting a small business.
You can generate a decent income without affecting your Social Security benefits much. If you're not yet at your full retirement age (FRA) this year, you can earn up to $22,320 without triggering a reduction in your Social Security payment. Even with the income limit, the Social Security Administration only reduces your benefit by $1 for every $2 earned above this limit. These income-limit rules become more generous as you approach your FRA.
If you're still working and not yet in receipt of Social Security benefits, delaying your retirement as long as possible is your best bet. This gives you extra time to save and increases your eventual Social Security payment. Although you can claim your benefits as early as age 62, each year you wait adds 5% to 8% to your monthly benefit.
When you reach 70, there's no further upside in waiting to claim Social Security benefits, and there's no penalty for earning additional income once you reach your FRA.
An unattractive scenario best avoided through extensive planning
The most effective way to avoid such a challenging scenario is to ensure you never find yourself in a situation that requires relying solely on Social Security in retirement.
Challenges like bankruptcy and health issues can drain your savings. Other times, circumstances may not allow for any extra money to be saved for retirement. Regardless, no judgment is passed on those living on Social Security income in retirement.
In as many ways as possible, take action now to generate income beyond Social Security benefits later on. Even saving $100 a month and investing it in a stock index fund could lead to over $200,000 in savings after 30 years based on an average annual return of 10%.
Remember, time is your primary ally when it comes to investing. Starting early with even a small investment can yield substantial returns due to compound interest.
Despite the average Social Security benefit of $1,900 per month not being sufficient to cover the typical household's essential expenses of $72,967 annually, some retirees may rely solely on these benefits due to lack of retirement savings. If you find yourself in this situation, consider suspending your Social Security retirement benefits and restarting them later at a higher rate, provided you have an alternate source of income during this period. Alternatively, continuing to work, especially if you're not yet at your full retirement age, can help bridge the gap between your income and expenses.
