Could you live on $16,000 a year? Here’s why you should


We’re told time and time again how important it is to save independently for retirement, but many of us still don’t listen.

33% of Americans have no money saved for retirement, but it’s even scarier that 30% of over-55s are in the same boat. And a big reason why many of us don’t save is because of Social Security.

In fact, according to the National Academy of Social Security, Social Security is the sole source of income for nearly 25% of Americans over 65.

But while it’s true that Social Security helps many seniors stay financially afloat in retirement, there’s a real danger in relying too much on it. And if we don’t start taking matters into our own hands, many of us risk coming up short when retirement arrives.

Can you live on Social Security alone?

The problem with Social Security banking is that your benefits are only designed to replace about 40% of your pre-retirement income. This is not just an educated guess; The Social Security Administration says so too.

Now that you’re retired, you’re hoping your living costs will drop — so much so that you’ll be able to survive on Social Security alone — but the truth is, that’s not likely to happen.

On the one hand, you will have much more free time at your disposal, which means that you will spend more on leisure and entertainment. But more importantly, you’ll have health care to worry about, and that’s where so many seniors look for loopholes.

According to 2016 data from HealthView Services, a provider of healthcare cost projection software, the average healthy 65-year-old couple retiring this year can expect to pay $377,000 during retirement.

Young couples have it even worse. Today’s average healthy 55-year-old couple can spend as much as $466,000 in health care expenses during retirement, and today’s 45-year-old couple can incur $592,000 in health care expenses. And those are the numbers that healthy couples face. If your health is not good, your expenses can go up even more.

When you think about it that way, Social Security probably isn’t enough, especially since the average recipient currently receives $1,341 in monthly benefits, or more than $16,000 a year. Even if you and your spouse each receive $16,000 a year in Social Security benefits, for a total of $32,000, if you spend $377,000 like the average healthy couple in 20 years of retirement, that’s $18,850 in medical costs each year. alone Subtract that figure from the $32,000, and you’re left with more than $13,000 a year, or roughly $1,100 a month, to cover the rest of your expenses.

And as much as you might try to keep your living costs down, you can’t skimp on basics like food, electricity, transportation, and housing. In 2014, the average American spent $934 per month on rent alone. If you’re in a similar boat, that means you’d be left with less than $200 a month to cover your other expenses if you relied solely on Social Security. And that is not enough.

Time to start saving

If $16,000 a year per person in retirement doesn’t sound like enough, it’s time to start saving independently while you still have the chance. Even though retirement is less than a decade away, there’s still time to build up some savings before you stop working for good. Anyone age 50 or older can contribute up to $24,000 per year to a 401(k) and $6,500 per year to an IRA. If you can’t max out those contributions, do what you can. Saving just $250 a month over 10 years will give you an extra $36,000 in retirement if your investments generate a relatively conservative 4% annual average return.

If you’re still in your 30s or 40s, you have an even better chance of catching it. Saving $250 a month over 20 years will leave you with $137,000 for retirement, assuming your investments generate an average annual return of 8% – a reasonable assumption for younger investors who are able to be more aggressive.

If you’re now in your 60s and still need to start saving, you may want to delay retirement and work a few more years to put some money aside. While it may not be your ideal solution, some studies have shown that working longer hours can lead to a longer life. Another option? Working part-time in retirement to supplement Social Security benefits.

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No matter what you do to create additional retirement income, don’t make the mistake of relying solely on Social Security to fund your golden years. Social Security can and should play a big role in your retirement budget, but without another source of income, you risk running out of money when you need it most.

CNNMoney (New York) Posted November 29, 2016: 11:45 am ET