As of 2015, there were roughly 65 million people receiving Social Security benefits, according to the Social Security Administration. And of those 65 million, over 60% say their benefits make up at least half of their income.
That shouldn't come as any surprise, as the average American is woefully unprepared for retirement. In fact, one in three Americans has nothing at all saved for retirement, according to a survey from GOBankingRates, and a report from Merrill Lynch found that 81% of Americans don't even know how much money they'll need during retirement.
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As a result, more and more people are turning to Social Security benefits to fill the gap between what they have saved and what they need during retirement. The problem, though, is that Social Security benefits don't go as far as they used to -- so if you're planning to rely on that money to make ends meet, you could be in for a rude awakening.
Your checks won't stretch as far as they used to
Every year, Social Security recipients will see their benefits adjusted slightly to account for changes in the cost of living. However, the costs of many goods and services have increased faster than benefits are being adjusted, meaning that Social Security benefits don't stretch as far as they used to.
The buying power of Social Security checks has decreased by about a third since 2000, according to a report from the Senior Citizens League. The study states that although Social Security cost-of-living adjustments (COLA) have kept up with inflation over the years, retirees have seen their expenses increase by around 96% since 2000.
Many of these expenses are related to ballooning healthcare costs. For example, in 2000, the average Medicare beneficiary paid around $45 per month for Part B premiums. In 2018, that cost has increased to $134 per month -- a 195% jump. Similarly, the average American paid around $1,102 per year for out-of-pocket prescription drug expenses in 2000, but in 2018, that number is $3,172 per year.
For people relying on Social Security just to pay the bills, this poses a problem. There's not much you can do to combat skyrocketing healthcare costs, and when you're living on a fixed income during retirement, you risk spending your entire check on these expenses. For that reason, it's more important than ever to build up your own savings so that you don't need to rely primarily on Social Security to make ends meet.
Making the most of your money
If your personal retirement savings are falling short of what you'd hoped you'd have by now, you're not alone. But that doesn't mean you should just give up and assume that whatever you save now won't make a difference. If you have a strategic plan in place, you can boost your savings by thousands of dollars by the time you retire -- which can go a long way in making up for what Social Security won't cover.
One option is to simply delay claiming Social Security benefits by a few years. While you can claim benefits as early as age 62, for every month you wait past that age up until you turn 70, you'll receive slightly bigger checks. For example, say your full retirement age (FRA) -- or the age at which you'll receive 100% of the benefits you're theoretically entitled to -- is 67, and the full amount you'd receive if you claim at that age is $1,200 per month. If you claim early at 62, your benefits will be cut by 30% -- leaving you with just $840 per month. Wait until age 70 to claim, though, and you'll receive a bonus 24% on top of your full benefit -- which amounts to $1,488 per month.
The advantage of delaying benefits is twofold. First, you'll be receiving bigger checks, which can help in covering increasing expenses. Second, if you also wait a few years to retire, those few extra years you spend working (and continuing to contribute to your retirement fund rather than withdrawing from it) can significantly help.
For instance, say you're 62 years old with just $50,000 stashed in your retirement fund. You decide to work until you turn 70, then you'll retire and start claiming Social Security benefits simultaneously. Let's also say you're currently contributing $100 per month to your retirement fund. If you're earning a 7% annual rate of return on your investments, by the time you turn 70, you'll have a total of $98,700 in savings.
Also, if your employer offers matching 401(k) contributions, you could boost your savings even more. In this example, let's say you're earning $45,000 per year and your company will match 100% of your contributions up to 3% of your salary. That amounts to $1,350 per year, or about $112 per month. If you increase your contributions from $100 to $112 per month to earn the full employer match, that brings your total monthly contributions to $224. Assuming you're still earning a 7% annual rate of return, by the time you turn 70, you'll have about $114,500 stashed away. And on top of that, you'll also be earning that boost in Social Security benefits by waiting to claim until age 70.
Something to think about
Of course, not everyone will be able to work an extra few years. Health issues can come up, especially as you grow older, and they can make it harder to stay on the job for many workers.
But even with that potential challenge, getting a late start to the saving game doesn't mean you're completely out of luck. With Social Security benefits not going as far as they used to, you can (and should!) try to build up your own nest egg as much as possible before you retire to combat those increasing expenses. And while working a few extra years may not be part of your ideal retirement plan, when you do retire, it will be more enjoyable when you don't have to worry as much about making ends meet.
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