Maurie Backman, The Motley Fool •May 8,
2019
Millions
of seniors rely heavily on Social Security to pay the bills in retirement, even
though those benefits are designed to replace only a modest portion of the
typical worker's previous income. But new data from Nationwide paints an even more disturbing
picture: Preretirees are overestimating their future Social Security benefits
by 28%.
Future
retirees expect to collect $1,805 a month in Social Security benefits, but
according to Nationwide, the average beneficiary at present collects just
$1,408. (Note that according to the Social Security Administration, this figure
is actually $1,461.) This miscalculation could cause older workers to scale
back their savings efforts when, in fact, many should be ramping up to make up
for lost time -- especially since a separate report released a few years back
found that nearly half of preretirees have no money set aside for
their golden years at all.
If you're
nearing retirement, it's crucial that you get an accurate sense of what your
Social Security income will look like. At the same time, you'll need to make an
effort to save on your own if you want a shot at a comfortable retirement
instead of a cash-strapped one.
Social Security won't be enough
Many
people neglect their savings because they assume that they can mostly live on
Social Security. In reality, however, those benefits are designed to replace
only about 40% of the average earner's preretirement income. Most seniors need
roughly double that amount to live comfortably, and when we think about the
expenses retirees typically face, that makes sense.
Though
some seniors do manage to pay off their mortgages in time for
retirement, many do not. And even with a mortgage out of the picture, seniors
still need to cover the other costs associated with owning (or renting) a home.
Housing
aside, seniors also need to account for transportation, utilities, cable, phone
service, food, clothing, and healthcare. That last expense alone could cost
today's typical 65-year-old couple $285,000 in retirement, according to Fidelity, while
other projections point to even higher numbers.
That's
why you really can't afford to miscalculate your Social Security income, nor
can you afford to not save independently for your golden
years. Fortunately, the former problem is relatively easy to fix. Each year,
the Social Security Administration (SSA) produces an earnings statement for you
that summarizes your income and estimates your monthly Social Security benefit
at full retirement age. If you're 60 or older, you'll get a copy
of this statement in the mail, at which point you can review it to see what
your benefits might look like. If you're under 60, you'll need to create an account on the SSA's website and access that
information yourself.
At the
same time, you'll need to push yourself to fund your IRA or 401(k) if you want
to avoid financial struggles once your working years come to an end. If you're
50 or older, you can contribute up to $7,000 to an IRA this year, or up to
$25,000 to a 401(k).
Now, if
you're not used to saving much (or at all) for your golden years, you probably
can't manage a $25,000 contribution too easily. But saving $7,000 a year for
retirement over a 15-year period will leave you with a $196,000 nest egg,
assuming your investments generate an average annual 7% return during that
time. Make it $10,000 a year, and you'll be looking at $251,000. Mind you,
neither amount is huge in the grand scheme of what could be a 30-year
retirement -- but it's certainly better than nothing.
If your
goal is to enjoy a financially secure retirement, make sure you're realistic about
the role Social Security will play in it. Get an accurate estimate of your
benefits, and know that they can't sustain you by themselves. It's a far better
bet than neglecting your savings and regretting it after the fact.
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