There’s a mistake many Americans have made in the past and are guilty of making right now. They’re relying primarily or entirely on Social Security for income during retirement. Don’t make this same mistake. The end result is you won’t be able to pay all of your bills and may have to find another job to supplement your income. Social Security benefits should be viewed as extra income, not the income you need to survive on. We discuss why.
The only way to avoid this fate — shared by the majority of Americans in retirement — is advanced planning.
You should take steps now to make sure you don’t find yourself relying upon Social Security as your main source of income during retirement. Once you reach retirement age, it will be too late.
So how common is full or substantial dependence on Social Security in retirement? According to the Social Security Administration’s own numbers…
- Nine out of ten individuals age 65 and older receive Social Security benefits.
- Social Security benefits represent about 39% of the income of the elderly.
- Among elderly Social Security beneficiaries, 53% of married couples and 74% of unmarried persons receive 50% or more of their income from Social Security.
- Among elderly Social Security beneficiaries, 22% of married couples and about 47% of unmarried persons rely on Social Security for 90% or more of their income.
To avoid becoming part of these statistics, try implementing the following five strategies immediately.
1. Start Funding a Retirement Plan
Whether you are 25, 30, 45 or 50, start putting money into a retirement plan right now. If you have an employer-sponsored plan, be sure to take full advantage of it. Contribute at least enough to maximize the employer match on the plan, if they offer one. Otherwise put in as much money as you can afford.
If you’re not covered by an employer plan, start your own. You can set up a traditional IRA or a Roth IRA, and either will enable you to save up to $5,500 per year ($6,500 if you’re 50 or older), and you can also have a matching contribution for your spouse if he or she is also not covered by a plan at work.
If you’re self-employed or have a side business, look into setting up your own retirement plan, such as a SEP, which will allow you to save effectively 20% of your income for retirement.
Any money you can save for retirement now — regardless of how little it may seem — will reduce your total dependence on Social Security benefits in retirement. This is a smart step in the right direction.
2. Don’t Allow Yourself to Un-Save
What is un-saving? It’s withdrawing money from your retirement plan before you actually retire. In addition to the fact that this results in a higher income tax liability, as well as a 10% early withdrawal penalty tax, you’ll be draining your retirement resources for reasons other than retirement.
Unfortunately, this is not an uncommon practice. Many of us tend to have the vast majority of our financial assets in retirement plans, so these funds get raided when there’s a significant need for cash.
This is an even bigger problem among those who have relatively small accounts. The assumption is that since the amount in the plan account is completely inadequate for retirement, they may as well draw out the money for other purposes. But if you have this mindset, you’ll be sabotaging your efforts to ever accumulate a substantial amount of money for retirement. Once you put money into your retirement plan, pretend it doesn’t exist!
3. Save Outside a Retirement Plan
If you have very little money saved in an actual retirement plan and you’re getting close to retirement age, you can always save money outside of a formal retirement plan. This can be especially important if you want to maximize the amount of money you will have available at retirement but are limited in your contributions, such as the $6,500 contribution limit on an IRA.
Retirement savings don’t necessarily have to be in a formal retirement plan. You can save money in non-tax sheltered investments, such as certificates of deposit, mutual funds or even real estate investment trusts (REITs).
This also has the advantage of no tax on the withdrawals of your capital when you retire, since that money was invested with after-tax contributions.
4. Plan on a Post-Retirement Career or Business
If it’s looking like you’ll be primarily relying on Social Security during retirement and your assets will be inadequate to make a major contribution, you should plan to develop a post-retirement career or business. In this way, you’ll be opting for semi-retirement, rather than the full-blown version.
This doesn’t mean you have to continue to work on a full-time basis in your current job or career. You can reduce that to part-time when you reach retirement age, or you can shift into an entirely new job or even start your own business. The idea will be to scale down your efforts at producing earned income, rather than to outright retire.
The combination of a monthly Social Security check and an income from a part-time job or business can afford you a comfortable life for many years past age 65.
5. Get Out of Debt Completely
There’s one more step you absolutely must take to ensure you can still retire comfortably, and that’s to get out of debt completely!
This single step can dramatically reduce the amount of income you will need to support yourself when you reach retirement. At a minimum, you should make sure you own your home free and clear. The less you owe on car loans, credit cards and other loans, the less money you will need to live each month. Total up the monthly debt service for all loans you currently have outstanding; you may find you can reduce your monthly cost of living by well over $1,000. That will have obvious benefits when you reach retirement age.
And if you’re able to get out of debt before you actually retire, that may provide you with some valuable time and income to increase your retirement portfolio. And this will increase the amount of income you’ll have from that source.
If you expect to only have Social Security income during retirement, consider taking this multi-step approach to reducing your dependence on that source.
Pick at least two or three of the strategies above and begin implementing them now. It could mean the difference between a comfortable retirement and a life of continued work and struggle.