Social Security benefits are meant to replace around 40% of pre-retirement income for most seniors. Taking a 60% pay cut would mean dramatically scaling down your living standard. And, even then, it might be hard to bankroll your retirement with Social Security alone.
You can, however, take steps to increase your monthly retirement checks to ensure your benefits pay for as much as possible in your later years. Here are three strategies to implement if you're hoping to rely primarily or solely on Social Security to fund your lifestyle after paychecks stop.
Image source: Getty Images.
1. Maximize your monthly Social Security income
If you are hoping Social Security is going to be a significant income source in retirement, you need to do all you can to make your checks as big as possible. There are a few different ways you can do that:
- You can increase how much you earn over your lifetime. Social Security benefits are based on a percentage of average wages. The more you earn (up to an annual wage base limit), the higher your benefit becomes.
- You can plan strategically with your spouse. Spousal benefits can sometimes be higher than your own benefits if your partner made a lot more than you. If you want the highest combined Social Security income, work together to decide on a joint claiming strategy.
- You can delay your claim for Social Security benefits. Although you first become eligible to get retirement income at 62, every month you wait results in a benefit increase until age 70. Since claiming benefits at 62 can reduce your standard benefit by as much as 30% while claiming benefits at 70 can increase it by as much as 24% if you have a full retirement age of 67, it may be worth delaying if you're trying to bankroll your retirement with Social Security.
2. Minimize the taxes you pay on your benefits
A growing number of retirees end up paying taxes on Social Security benefits because the thresholds at which those benefits become taxable on the federal level is not indexed to inflation.
While traditionally only wealthy people needed to worry about taxes on Social Security checks, that's no longer the case. If your countable income -- half of Social Security checks plus all taxable and some nontaxable income -- exceeds $25,000 as a single tax filer or $32,000 as a married joint filer, then you will be taxed on at least part of your benefits.
If you want to reduce the likelihood you'll end up losing some of your money to the IRS, invest in a Roth 401(k) or Roth IRA for your retirement instead of a traditional account. The distributions from Roth accounts aren't included in taxable income so you should hopefully be able to keep more of your money for yourself instead of giving the government a cut.
3. Base your budget around your Social Security benefit amount
Finally, if you are hoping to live primarily -- or even solely -- on Social Security, you're going to need to have a very tight budget. You should make sure your house is paid off and you live in an area with low property taxes so you don't have high housing costs. You should shop carefully for medical coverage to reduce healthcare expenses, and choose a low cost-of-living area.
The harsh reality is, you can't really bankroll your retirement with Social Security alone because benefits aren't meant to be your sole income source -- even if you are careful with money. You're supposed to replace around 40% or more of your earnings with a pension and savings. So if you don't have lots of income from these other sources, you'll have to live a very spartan life as a senior.
Of course, you can also try to save more throughout your working life so you can fund your retirement with Social Security and other income sources and enjoy your later years instead of trying to live on a shoestring budget. For most people, this is the best move rather than trying to make Social Security stretch further than it's meant to.
