Could you live on Social Security? That seems to be a stock answer for many folks nearing retirement, and it’s a tremendously misguided view.
According to the Social Security Administration’s latest statistical snapshot, here’s what people now taking Social Security really make: $1,297.55 a month. Totaled out across a full year, that’s just $15,571 to pay all of your expenses.
If you own your home and have no debts, you might be okay some months on that income level, but in time expenses will creep up. Transportation and healthcare, for instance. Living simply is not really an answer in a time of rising medical costs.
So where does Social Security fit in the big picture? The real job of the retirement system, in fact, is to prevent extreme poverty in old age. The assumption the government makes, and has always made, is that you have saved some on your own for retirement and likely have access to a pension plan from an employer.
Pension plans are getting scarce these days, so it really is coming down to saving enough now, while you work, to ensure that your retirement plan is a step above just getting by.
Here are the components of a real retirement plan today:
You will need a fair amount of just straightforward cash in the bank — several months’ worth of living expenses at least — to live comfortably in retirement. Unlike while you were working, it will not be possible to run up a credit card to pay for gas, groceries or the occasional night out.
In fact, it might be a good idea to wean yourself off of credit cards entirely while you still have a an income, just to be ready for that change.
2. Base income
Social Security is one form of basic income. Another might be an annuity, although often the terms on annuities are terrible. Sometimes, whole life insurance can be converted into an income vehicle.
However, the bulk of your reliable income should be coming from a well-designed investment portfolio, one that uses dividend income, bond interest payments and occasional asset sales to generate a steady monthly paycheck.
3. Forward investments
Last but not least, you will need to continue to invest. The tricky part of making money work for you in retirement is avoiding the inflation trap. As time passes, purchasing power declines. It always has and always will.
The solution is to own at least some stocks even into your retirement years. These should be solid, blue-chip firms with steady, long-term track records, but a smattering of international stocks can help amp up your return enough to offset the occasional downturn at home.
As always, rebalance and reinvest in this portion of your retirement plan to capture gains as they happen.