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Planning for Retirement: Can You Rely on Social Security Alone?

Social Security provides a form of guaranteed income in retirement for those who have worked and paid Social Security taxes for at least 10 years. Benefits can start at age 62, but the amount varies. Whether Social Security alone can fund your retirement depends on your lifestyle and benefit amount. While it can help, it’s crucial to save more to ensure you can live the life you want in retirement.

Can You Retire on Social Security Alone?

If your expenses are low and your Social Security benefit is sufficient, it might cover all your income needs. However, several factors need consideration:

• Your retirement lifestyle: Will Social Security be enough to maintain your lifestyle? If you plan on luxury travel or expensive hobbies, you’ll likely need more.
• Your age: Delaying your Social Security benefit increases the amount you’ll receive. Retiring early may lead to higher healthcare costs, as Medicare eligibility starts at 65.
• Your benefit amount: Your earnings and work duration affect your Social Security benefits. The Social Security Administration offers calculators to help estimate your benefits.

Estimated Average Monthly Benefits as of April 2023

• Retired worker only: $1,825
• Aged couple, both receiving benefits: $2,959
• Young widower with two or more children: $3,392
• Aged widower, alone: $1,710
• Disabled worker, young spouse, and one or more children: $2,609
• Disabled worker only: $1,464

How Is Social Security Calculated?

Your benefit amount is primarily based on your earnings during your working years. The Social Security Administration adjusts your earned wages based on average wage changes since you began paying Social Security taxes. They then calculate your average monthly earnings over the 35 years you earned the most and apply a formula to determine your basic benefit at full retirement age. You can log in to your Social Security account to see personalized retirement benefit estimates.

How Much Social Security Will You Get in Retirement?

Several factors affect your Social Security benefits:

• The age you begin taking benefits: Starting before your full retirement age (67 for those born after 1959) reduces your amount. Delaying beyond full retirement age increases your benefit by 8% per year up to age 70.
• Government workers with a pension: The Social Security Administration may use a different formula for those eligible for a retirement or disability pension without paying Social Security taxes.

How to Save for Retirement

Since Social Security benefits can vary, it’s essential to build your own nest egg. Here are some primary ways to save for retirement:

Contribute to a 401(k)

A 401(k) is an employer-sponsored retirement account with tax advantages. Contributions are tax-deferred, and employers may match contributions. In 2023, you can contribute up to $22,500, with an additional $7,500 catch-up contribution if you’re 50 or older. Early withdrawals before age 59½ typically incur a 10% penalty.

Kick Into an Individual Retirement Account (IRA)

An IRA is a self-funded retirement account. In 2023, you can contribute up to $6,500 across all IRAs, with an extra $1,000 for those 50 and older. There are two main types:

• Traditional IRA: Contributions may be tax-deductible, and taxes are deferred until retirement distributions. Early withdrawals before age 59½ may incur penalties.
• Roth IRA: Funded with after-tax dollars, so distributions in retirement are tax-free. Income eligibility limits apply.

Consider a Health Savings Account (HSA)

An HSA offers tax-deductible contributions and tax-free growth. Withdrawals for qualified medical expenses are tax-free. In 2023, you can contribute up to $3,850 for self-only plans and $7,750 for family plans. After age 65, funds can be used for any purpose, though non-medical withdrawals are taxed.

Think About Permanent Life Insurance

Permanent life insurance provides a death benefit and accumulates cash value over time. You can draw on this cash value for retirement income, though it may reduce the death benefit.

The Bottom Line

Social Security can be a significant source of retirement income, but it may not be enough to fund your lifestyle. Building your own nest egg through savings in a 401(k) or other retirement accounts is essential. Whether you’re years away from retirement or nearing it, maintaining strong credit health is crucial. Free credit monitoring with Experian can help you stay on top of your credit report and detect potential identity fraud.

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