The experts say Social Security provides about 40% of the typical retiree’s pre-retirement earnings.
But that percentage varies a lot. Lower earners receive a higher percentage of their earnings and higher earners receive a lower percentage of their earnings.
I write a lot about the importance of saving money for retirement because of this 40% statistic. But COULD I live on my social security alone? If I could, what would that life look like?
I went to the Social Security Administration’s Website to find out how much Social Security I should receive. They have a fantastic estimator that allowed me to get my amount based on no earnings from now until my full retirement age of 67. They tell me I should receive about $30,000 a year or $2,500 a month at 67. It seems like a lot but it’s quite a bit less than I spend now.
For 2017, the highest Social Security payment is $32,244 a year for someone retiring at their full retirement age of 66. If you worked for 30 years but earned very little, the lowest Social Security payment is $9,984 a year.
I was a high earner and I often reached the contribution limit. But Social Security uses the highest 35 years’ earnings to calculate the benefit. I only have 34 years of earnings–and some of those years I was in school and earned very little.
See Social (in)Security is Complicated! if you wonder why I’m counting on Social Security, how the benefit is calculated and links to great resources.
I don’t have an extravagant budget–but it’s pretty cushy. I’m able to do everything I want and still stay within it. Keep in mind, my budget includes replacing my car every 8 to 10 years and setting aside money for major maintenance items on our homes.
If I had to live on Social Security alone, I’d need to get out the hedge trimmers and wack away at that budget.
So here goes . . .
Well, vacations are out. Vacations represent almost a quarter of my budget, if I need to live on Social Security they’re gone.
Our desert home is out. I guess I can embrace the cold . . . That saves over 10% of my budget or I could embrace the heat and sell our mountain home. That would save me even more.
Say goodbye to the boat. At 67 I probably couldn’t hoist myself into it anyway. Bon voyage!
Well, those were the easy ones . . .
How about my general spending category? This covers groceries, clothing, entertainment, charitable contributions, this blog’s cost, hair cuts & color, dining out, etc.. I guess I could cut about a quarter of these things without too much heartache. I don’t need a social life right? With that awful hair, no one will want to hang out with me anyway. That saves me about 5% of my budget.
Vehicle expense, I guess we could get rid of one car and Mr. Ms. Liz and I could share? Togetherness and all that, right? That’s gets me a bit more plus I would only be buying 1/2 a car every 8 years or so.
Property taxes and utilities . . . I guess it’s time to downsize. That should save a bit. And we could turn the heat down, it’s getting a bit too comfortable in here at 68 degrees . . .
Cell phone, I’m still on an expensive plan with my fancy iphone. I’ll just get a phone at Wal-mart, that will work fine and I’ll save at least $400 a year.
Cable and internet, maybe I’ll just check out movies at the library and use their internet.
OK that just might get me where I need to be to live on Social Security. Whew! I DID it!
As long as healthcare costs don’t go up. And healthcare is a huge IF.
Oh, and Mr. Ms. Liz needs to live as long as I do or my utilities and property taxes double (we keep our money separate). Oops he’s 8 years older than me so that’s not likely. I’d have to get a roommate–hope that downsized house is big enough.
And what a life I’ve left myself–I think I’d rather go back to work.
Now lots of people thrive on $30,000 a year. It’s a ton of money to support one person. Check out the Frugalwoods for some inspiration. But for someone who was accustomed to more extravagances, it would be a difficult shift. Especially when you have all this time on your hands. It helps to have a bit of money to create amazing experiences. Scraping by is not how I envision my final act.
My social security will be a huge help with my finances but it won’t be my only support.
I saved a large portion of my income–over 30% of my net income in most years and as much as 70% as I got closer to early retirement. Curious about my savings rate? Read this. Curious about how I’m funding my retirement? Read this.
So this was a fun exercise. And fortunately, for me, it’s only an exercise.
If your Social Security provides only 40% of your needs, you’ll need to be saving and investing to fund the rest of your needs. How much should you save? Well, that depends on how long you want to work.
If you want to WORK 42 years, then saving 10% of your gross income into a Roth IRA or 401k is enough. This would allow you to retire at a typical age–start at age 22, and you can retire at 64.
If working 42 years doesn’t sound fantastic, then ramp up your savings rate so you can reach retirement earlier:
All calculations assume a 5% investment return after inflation, a 4% withdrawal rate in retirement with retirement expenses equal to your after savings take home pay.
If you’re savings is going into a traditional retirement account, you’ll need to save even more because the tax man takes a portion of your withdrawals.
I worked about 29 years and that still seems right for me. I could have retired earlier if:
I was comfortable with more risk–would my life outlast my money?
or if we had been more frugal–life without some extravagances.
or if I had found this FIRE (financial independence/retire early) thing earlier–more focus would have produced better results
What seems right for you? How many years do YOU want to work? What’s your final act going to look like? Are you stashing cash so it can be amazing? Or will you be getting the hedge trimmers out to wack away at your budget?
I welcome your comments and questions.
Photo credit – Ms. Liz on Nakamun Lake, near Edmonton, Alberta, Canada