Your Social Security Check Is Not a Budget. Here’s How Retirees Should Build Around It
Social Security can help you cover expenses in retirement such as groceries, housing, utilities and transportation. It can give your budget some breathing room and allow you to leave more money invested in stocks and bonds to grow over time.
But the program isn’t meant to be your only source of income in retirement. It replaces roughly 40% of someone’s annual pre-retirement earnings on average, according to the Social Security Administration. That means you’ll need to plan how to navigate rising costs with additional forms of income and savings.
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Social Security is income, not a full retirement plan
Your monthly budget shouldn’t be based entirely on your benefit. If you receive $3,000 per month from Social Security, you may have to spend more than $3,000 per month to keep up with living expenses. Even if you factor in the cost-of-living adjustment (COLA), your Social Security benefits likely won’t be enough to fund your retirement.
These benefits can cover some of your essential expenses, but there will be a gap. A retirement plan can close the gap and leave you with extra cash so you don’t have to stress about money. A part-time job can also be a good idea if you don’t have enough savings to cover your expenses.
Build the budget from must-pay expenses first
When budgeting, consider your non-negotiable costs, or those that you simply can’t cut. You can’t eliminate expenses related to housing, utilities, insurance premiums, groceries and transportation. You will also have to pay taxes and any applicable debt payments.
There are ways to lower each of these costs. Downsizing, traveling less often, walking or biking instead of driving when you can, getting higher deductibles and making meals at home can lower your costs. Housing is often the biggest expense, so focusing efforts to free up your budget on that line item can help.
Once you address non-negotiable costs, you can review discretionary spending. Look for ways to trim your spending on optional items, such as entertainment. The library offers plenty of resources that can replace monthly subscriptions. You can also exercise with at-home equipment instead of paying for a gym membership.
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Use savings strategically to fill the gaps
Retirement plans can fill in the gap that Social Security leaves. After getting government checks, you can tap 401(k) and individual retirement accounts (IRAs) that you contributed to during your career.
If you have multiple retirement accounts, it’s important to withdraw from them strategically. For instance, withdrawing from tax-deferred accounts each year can lower your balance by the time required minimum distributions (RMDs) kick in, which may allow you to lower your tax bill later in retirement. Retirees can balance tax-deferred account withdrawals with Roth IRA withdrawals, which are tax-free.
Ideally, you’ll keep some money in stocks and other assets to help your money grow over time and outperform inflation. However, you’ll also want to keep some cash on hand that you can use for surprise costs such as car repairs, dental work and home maintenance. Staying on top of your finances and reviewing your spending every month can help you prepare for surprises instead of getting caught off guard. If you aren’t sure how to strategically withdraw from your accounts or how much you should have in savings when you retire, it may be worth speaking with a financial planner.