Social security benefits do not go as far as you think in retirement – The Motley Fool

According to the Social Security Administration, in 2015 about 65 million people were receiving social security benefits. And of these 65 million, more than 60% say that their benefits represent at least half of their income.

This should not be a surprise, as the average American is unfortunately not prepared for retirement. In fact, according to a GOBankingRates poll, one in three Americans did not save anything for retirement, and a report by Merrill Lynch found that 81% of Americans do not even know how much money they will need during retirement.

Source of the image: Getty Images.

As a result, more and more people are turning to social security benefits to bridge the gap between what they have saved and what they need in retirement. The problem, though, is that social security benefits do not go as far as before – so if you plan to use that money to make ends meet, you may wake up suddenly.

Your checks do not extend as far as they were

Each year, social security beneficiaries will have their benefits adjusted slightly to reflect changes in the cost of living. However, the costs of many goods and services have risen faster than the benefits are being adjusted, which means that social security benefits have no longer been extended.

According to a report from the Senior Citizens League, the purchasing power of social security checks has declined by about a third since 2000. The study indicates that, although adjustments to the cost of living of social security continued to keep up with inflation over the years, retirees have seen their spending increase by about 96% since 2000.

Many of these expenses are related to the high costs of health care. For example, in 2000, the average Medicare beneficiary paid about $ 45 a month for Part B premiums. In 2018, this cost increased to $ 134 a month, a jump of 195%. Similarly, in 2000, the average American paid about $ 1,102 a year for prescription drug expenses, but by 2018 that figure was $ 3,172 a year.

For people who depend on social security just to pay the bills, this is a problem. You can not do much to fight the escalating health costs, and when you live on a fixed income during your retirement, you risk spending your entire check on these expenses. For this reason, it's more important than ever to build your own savings so you do not have to rely mainly on social security to make ends meet.

Make the most of your money

If your personal retirement savings do not match your expectations, you are not alone. But that does not mean you just have to give up and assume that everything you save now will make no difference. If you have a strategic plan in place, you can increase your savings by several thousand dollars when you retire – which can largely offset what social security will not cover.

One option is to delay the claim for social security benefits by a few years. Even if you can claim benefits as early as age 62, you will receive slightly higher checks each month that you will be over age 70. For example, if you have reached the age of full retirement (or the age at which you will receive 100% of the benefits you are theoretically entitled to), you must pay 67 and the total amount you will receive if you declare this age is $ 1200 a month. If you claim early at age 62, your benefits will be reduced by 30%, leaving you with only $ 840 a month. Wait until the age of 70 to claim, and you will receive a 24% bonus in addition to your full benefit – which equals $ 1,488 a month.

The advantage of delaying benefits is twofold. First, you will receive larger checks, which will help cover rising expenses. Secondly, if you also wait a few years before you retire, the extra years you spend on your work (and continue to contribute to your retirement fund rather than withdrawing from it) can go a long way.

For example, say you are 62 with only $ 50,000 stored in your pension fund. You decide to work until age 70, then you retire and start claiming social security benefits simultaneously. Let's also say that you are currently contributing $ 100 a month to your pension fund. If you earn an annual rate of return of 7% on your investments, by the time you turn 70, you will save $ 98,700.

In addition, if your employer offers 401 (k) equivalent contributions, you could still increase your savings. In this example, suppose you earn $ 45,000 a year and your business will pay 100% of your contributions up to 3% of your salary. That equates to $ 1,350 a year, or about $ 112 a month. If you increase your contributions from $ 100 to $ 112 a month to get 100% of your employer, that brings your total monthly contribution to $ 224. Assuming you still get an annual rate of return of 7%, by the time you reach the age of 70, you will have about $ 114,500. And on top of that, you will also earn this increase in social security benefits while waiting to claim until age 70.

Something to think about

Of course, not everyone can work a few more years. Health problems can occur, especially as you get older, and can make it difficult for many workers.

But even with this potential challenge, getting a late start of the backup game does not mean you're completely unlucky. As social security benefits do not go as far as before, you can (and should!) Try to build your own nest egg as much as possible before retiring to combat these rising expenses. And while working a few extra years may not be part of your ideal retirement plan, when you retire, it will be more enjoyable if you do not have to worry about making ends meet.