To be clear, Social Security was never intended to cover all of your retirement income. With the prospect of reduced payouts starting in about a decade, the program shouldn’t even be expected to cover the majority of your retirement income.
However, given your anticipated future needs and assuming that most scheduled Social Security benefits will continue to be paid, it may still be helpful to know what to expect. Here’s a rough idea of what you can expect then, based on what’s happening now.
The average number is 67 year olds
There are several factors that determine your future Social Security retirement benefits. Your income during your working years is one of them. The more taxable income you earn, the more you will get back in retirement. The number of years you have worked also plays a role.
The age at which you receive benefits also plays a role. Although your so-called “full retirement age” is between 66 and 67 (depending on when you were born), you can opt for a drastically reduced monthly pension starting at age 62. Or, if you can wait until you’re 70, you’ll collect measurably more than average.
If you’re just looking for a rough number to help you make a mental plan, the average monthly Social Security benefit for 67-year-olds is $1,883.50 as of December 2023. That’s $22,600 per year. That’s not terrible. But it’s definitely not a lot of money either. The Bureau of Labor Statistics reports that a typical U.S. household needs about $73,000 per year to cover normal living expenses such as food, clothing and shelter.
As a retiree, you may not have any work-related expenses. On the other hand, as someone of advanced age, you may have to deal with higher-than-average healthcare costs that Medicare doesn’t cover. Whatever Social Security benefits you expect, you will likely need more than the government program provides.
The million-dollar question, of course, is: How do you prepare for a higher retirement income than Social Security provides? Here are some tips.
Rely less on Social Security and more on yourself
There are some painfully obvious answers to the question. Earning more is one of them. Saving more is another matter. However, these ideas lack the specificity necessary to make them actionable. The more detailed a plan is, the more likely it is to achieve its goal. Here are some suggestions:
1. Commit to contributing at least $6,500 per year to a retirement account
Admittedly, coming up with an extra $6,500 is no easy task given the high cost of, well, everything. But if there’s a way to make this feasible, you should do it. Invest $6,500 per year in an index fund based on the S&P 500 – with an average annual return of 10% – should be worth in the order of $120,000 within a decade or more than $400,000 within 20 years. The latter amount can realistically generate income in the region of $1,000 each month.
But what if there’s no way to come up with $6,500 a year? That’s fine. Save what you can, when you can. Something is better than nothing. Increase the number later if you can.
OhAnd if you’re wondering where that number comes from, $6,500 is the maximum amount you can contribute to a personal IRA (individual retirement account) in a given year. (If you’re over 50, it’s $7,500.) However, if you can come up with more than $6,500 (or $7,500) a year, there’s certainly no reason why you can’t use that excess money should invest outside of an IRA.
2. Wait as long as possible to claim Social Security benefits
For someone who can’t wait to live each day on their own terms and schedule, that’s a lousy prospect. However, it might make sense to delay the start of your Social Security benefits—even if that means continuing to work at your job.
As noted, although your official full retirement age (or FRA) is 66 or 67, there is no legal requirement to start receiving your benefits then. If you wait until you’re 70 to file, your monthly Social Security check will be about 32% more than if you claimed it at your FRA. That would increase the average value from $1,883.50 to about $2,500. Not bad.
Even if you can’t wait until you’re 70, you can delay getting help each month. Delaying the start of your benefits may add additional years of high-earning work to your earning history, which will also increase your eventual monthly payment.
3. Buy-and-hold is not the same as buy-and-forget
While most investors only have a vague idea of what they want to achieve and how they want to achieve it, there is always room for improvement. The key is to create a detailed plan for your portfolio and then stick to it.
The core of these details will be time based. You can invest aggressively for growth when you’re ten years from retirement, knowing you’ll have time to recover from any cyclical setbacks. However, things change when it’s been three years since your retirement. Until then, you should move out of your riskier growth stocks and into more reliable holdings (and especially safer, income-producing stocks).
But don’t stop there. Although the more conservative portfolio you’ll likely want to have in retirement should require even less active management than when you were working, there are still reasons to tweak and optimize your holdings. Maybe this blue-chip stock is finally reaching a limit to its growth. It’s possible that a dividend-paying company’s payout ratio has started to reach worrying levels.
The point is that even in retirement, the nickels and dimes add up to dollars over time. Don’t suffer from subpar performance just because you’re distracted by other things.
Just make a plan (even a mediocre one) and then execute it
Maybe you’re excited because you’re doing better than average (or because you know you will be when the time comes)? Maybe you’re frustrated because you’re on the other end of the spectrum? Whatever you do, don’t think about it too much. Again, Social Security was never intended to cover your entire retirement income, and the average payment isn’t exactly impressive at any age. They will want to do more than the capacity of the state program anyway.
The most important advantage for investors is therefore simply to create a detailed plan and then implement it in a targeted manner. You may end up not caring that the monthly amount of $1,883.50 is a bit paltry. You could end up doing much better with your own savings and investment plan.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
“This Is the Average Social Security Benefit for Age 67” was originally published by The Motley Fool