The Short Answer
For most retirees, relying solely on Social Security income is not advised. The average monthly Social Security benefit as of 2023 is only $1,668 for retired workers. With the average monthly expenditure for senior households at around $4,300, Social Security alone would likely not provide enough income to cover basic living expenses. Financial experts recommend retirees have multiple sources of retirement income to maintain their standard of living.
What is Social Security?
Social Security is a federal program that provides monthly income to qualifying retired and disabled workers and their families. The program is funded through payroll taxes – workers and employers both pay a percentage of wages into the Social Security system. Upon reaching age 62, workers can begin claiming Social Security retirement benefits based on their lifetime earnings. The age you start collecting Social Security impacts your monthly benefit amount. You can get 100% of your full monthly benefit at your full retirement age, which ranges from 66 to 67 depending on your birth year. Claiming early at 62 permanently reduces your monthly benefit.
How Much Does the Average Retiree Get from Social Security?
According to the Social Security Administration (SSA), the average monthly Social Security benefit for all retired workers as of January 2023 is $1,668. The maximum possible monthly benefit for someone retiring at full retirement age in 2023 is $3,345. Your actual benefit is calculated based on your lifetime earnings – higher earners get larger Social Security checks. Benefits also increase annually based on cost-of-living adjustments. Married couples receive the higher earner’s full benefit amount, with the lower earner eligible for a spousal benefit up to 50% of the higher earner’s amount.
Can You Actually Retire on Just Social Security?
While it may technically be possible to get by on Social Security alone, doing so would mean living on a very tight budget. The average senior household spends around $4,300 per month on essentials like housing, food, transportation, and healthcare. Relying solely on the average $1,668 monthly Social Security benefit would make it very difficult to cover expenses later in retirement. Financial experts strongly advise retirees have multiple sources of predictable income, including personal savings and investments, to maintain their standard of living in retirement.
The Pros and Cons of Retiring on Social Security Alone
Pros
– Guaranteed income for life – Social Security benefits are guaranteed and continue as long as you live.
– No investment or longevity risks – You don’t have to worry about outliving savings or investments going down in value.
– Low taxes – Up to 85% of Social Security benefits are tax-free for some retirees.
– Provides basic income floor – Social Security forms the base layer of income to cover some portion of essential costs.
Cons
– Very tight budget – The average benefit only covers about 40% of senior living costs. Difficult to maintain your current lifestyle.
– Vulnerable to inflation – Cost of living increases can quickly erode the purchasing power of fixed Social Security income.
– No flexibility or growth – Benefits stay flat; they do not adjust based on increasing living expenses in retirement.
– Limited survivor benefits – Surviving spouses see a reduction in the combined household benefit amount.
– Penalties for early work income – Your Social Security benefit is reduced if you earn over certain limits before your full retirement age.
How Much Money Do You Need to Retire?
Financial advisors estimate you should plan to replace around 70-80% of your pre-retirement income in retirement from Social Security, pensions, personal savings and investments. This rule of thumb is based on the assumption your expenses will go down once you stop working. To determine your specific income needs, experts recommend first listing out your anticipated retirement living costs based on your desired lifestyle. Then identify any guaranteed income like Social Security and pensions. The gap between your expenses and your guaranteed income sources is how much additional retirement income you’ll need to generate from your own savings.
As a general guideline, most retirees find they need at least $1 million in personal retirement savings to generate $40,000 to $50,000 per year in retirement income. This is in addition to Social Security and any pensions. Of course, your specific savings target depends on when you start saving, your expected investment returns, and your projected retirement spending. Work with a financial advisor to develop a customized retirement plan.
How Much Should You Rely on Social Security for Retirement Income?
Financial planners typically recommend retirees limit their reliance on Social Security to 30-40% of their overall income needs. This helps ensure you have sufficient income from other sources to maintain your standard of living. Depending on the size of your Social Security benefit, you may need to supplement with personal savings, part-time work, pensions or income from rental properties, among other options. Diversifying your income sources also protects you in the event your Social Security benefit is lower than expected or cost-of-living adjustments fail to keep pace with inflation.
Tips for Retiring on Social Security Alone
If your only option for retirement income is Social Security, aim to maximize your monthly benefit and reduce expenses where possible:
– Delay claiming until age 70 if able – This permanently increases your benefit up to 32% over your full retirement age amount.
– Pay off debt – Eliminate expenses like car loans and credit cards so you have minimal fixed payments in retirement.
– Downsize your home – Consider relocating to a smaller, more affordable property.
– Move to a lower cost-of-living area – Relocate to a region with cheaper housing, goods and services.
– Work part-time – Earn up to $19,560 per year without impacting your Social Security benefit.
– Live with roommates – Split costs on housing and utilities.
– Leverage senior discounts – Take advantage of reduced prices and fees for seniors on groceries, transportation, entertainment and more.
Can You Use Other Income Sources and Still Get Social Security?
Yes, you can have other sources of income and still collect your full Social Security retirement benefit. However, you may pay federal income tax on a portion of your benefit once income from all sources surpasses certain thresholds:
– $25,000 single or $32,000 married filing jointly – Up to 50% of benefit is taxable
– More than $34,000 single or $44,000 married filing jointly – Up to 85% is taxable
These taxation thresholds do not affect your gross Social Security benefit amount. But higher overall income does mean you may owe federal tax on a bigger portion of your benefit.
Some income sources like wages can impact your Social Security benefit if you earn over the annual limits before your full retirement age:
– $19,560 in 2023 – If you earn over this, $1 is withheld from your benefit for every $2 over the limit
– $51,960 in 2023 – If you earn over this, your benefit is withheld starting at full retirement age until you hit your next birthday
Pension income, retirement account withdrawals, rental income, and other passive income sources do not affect your Social Security benefit amount. Only earned income from wages or self-employment is counted against the earnings limits if you claim Social Security prior to your full retirement age.
What Are the Best Ways to Supplement or Replace Social Security Income in Retirement?
To generate additional predictable retirement income beyond Social Security, consider these options:
Personal Savings and Investments
Savings accounts, CDs, money market funds, bonds, annuities, and dividend stocks can all provide retirement income. Withdrawals from tax-advantaged retirement accounts like 401(k)s and IRAs are another source of funds in retirement. The key is to build up your nest egg through consistent contributions and smart investing over your working years.
Pension Income
If you participate in a traditional defined benefit pension, you may receive set retirement income for life from your employer. Ask about opting for the joint and survivor option to secure income for both you and your spouse.
Part-Time Work
Working in retirement generates income while keeping you active and engaged. Part-time work, consulting, freelancing, and starting a small business are all options. Just stay under Social Security’s earnings limits if collecting benefits before full retirement age.
Income-Producing Real Estate
Owning rental property you collect rents on can provide retirement income. Downsizing to a smaller home then renting out your previous larger property is one way to take advantage of real estate.
Reverse Mortgage
A reverse mortgage converts part of your home equity into a lump sum or monthly income stream. It must be repaid when you sell the property or die. Interest rates are typically higher than on a traditional mortgage or home equity loan.
Living on Social Security Alone: Is It Possible?
While it is technically possible to get by on Social Security benefits alone, the lifestyle is likely to be very restrictive. The average monthly Social Security payment for retired workers only covers about 40% of senior households’ average expenditures. Retiring on Social Security alone means cutting back spending on essentials like housing, healthcare, food, and transportation. It also leaves you fully exposed to inflation and cost-of-living increases over a long retirement.
Most financial experts strongly advise supplementing Social Security with income from other sources to allow for a comfortable lifestyle in retirement. These include personal savings, part-time work, and pensions. Retirees should ideally limit their reliance on Social Security to 30-40% of their total income needs. Though it can act as a base income layer, Social Security alone does not provide enough for most seniors to maintain their pre-retirement standard of living. Developing multiple income streams creates a more stable financial foundation for your non-working years.
Conclusion
For the majority of retirees, Social Security benefits alone will not cover all living costs in retirement. With the average monthly payment covering less than half of the typical senior household’s spending, relying solely on Social Security would mean a bare-bones budget later in life. While it can act as one layer of guaranteed income, Social Security works best when combined with other income sources like retirement savings accounts, part-time work, and pensions. This creates income diversification and helps protect retirees from inflation eroding their fixed Social Security payments over time. Though it is possible to retire on Social Security alone, doing so means accepting an extremely frugal lifestyle in retirement.