Investing When Social Security is Not Enough

If you’re like most investors, you’ve spent a lot of time thinking about your retirement, and with good reason. According to the U.S. Census Bureau, the median household income is approximately $62,000. The average household income is only about $11,000 higher.

This means that the average Social Security benefit is approximately $1,461 per month. Could you retire comfortably on that amount? Could you retire at all?

That statistic isn’t meant to scare you, or maybe it is. Chances are you probably already know that Social Security is not going to be enough to fund your retirement. Many of you may wonder if Social Security will even be around at all – at least in its present form.

How much do you need to save?

In fairness, how much money a retiree will need is going to vary depending on an individual’s retirement goals. But let’s start with some averages. According to the Bureau of Labor Statistics, the average retiree spends $45,756 per year. Assuming a 20% effective tax rate that means the average retiree needs $57,195 in gross income per year in retirement.

If you subtract the average yearly Social Security benefit of $17,532 ($1,461 x 12), you arrive at about $39,600 of income that needs to come from retirement savings. Remember, this is an average. Some retirees will need more and some less.

You can’t count on a pension

Unless you work in the public sector (i.e. the government) or a union, you probably are not expecting to receive a pension. General Electric NYSE: GE just announced that they are making a buyout offer to 100,000 former U.S. employees who have not yet started drawing their pension. The company further announced they are freezing pension benefits at current levels for over 20,000 salaried employees.

But GE is just following the trend of many companies who are reducing or eliminating, pension benefits.  The Department of Labor’s Employee Benefits Security Administration reports that the number of pension plans offering guaranteed payouts (i.e. defined benefits) dropped 73% between 1986 and 2016.

Are you maximizing the benefits of your 401(k) plan?

Under current regulations, an employee can set aside $19,000 of tax-free money in an employer-sponsored 401(k). They can also save $6,000 in an individual retirement account (IRA). Employees over the age of 50 are eligible for additional catch-up contributions. It stands to reason that if your employer offers a plan, you should be taking advantage of it. Even if you can’t set aside the full amount, a little bit can go a long way.

Younger workers should be focused on growth investments. Since most plans offer a range of mutual funds and index funds, these workers should be as aggressive as their risk tolerance allows. Even if the economy goes into recession within the next couple of years, they have the benefit of time on their side. Historically, the market has had a return of around 7%. It’s true that a portfolio of growth funds is going to be more volatile, but unless you are expecting a significant gain in income where you can set aside more in your personal savings, allowing your money to grow in a tax-advantaged retirement account is your best bet.

Of course, if you’re closer to retirement, you may need to dial back on the equity portion of your fund allocation. You can look at Growth and Income funds that provide capital appreciation with the benefit of some dividends.

Looking beyond the 401(k) plan

As the gig economy becomes more prevalent, more and more workers are choosing to be self-employed. But you still have options to set up a tax-advantaged retirement plan. The five most common options are a traditional or Roth IRA, a Solo 401(k), a SEP IRA or a defined benefit plan. Some of these options are restricted due to the nature of your business. For example, you can only have a Solo 401(k) if you are self-employed with no employees (except a spouse, if applicable).

Most online brokers allow you to open up a self-employed retirement account (with the exception of a defined benefit account). Of course, you should be sure to talk with an accountant about the specifics of each plan to determine the type that is right for your business.

It’s never too late to start

Life happens. For many people, there are valid reasons why they have not been able to put aside money for retirement (job losses in mid-life, a family illness, etc.). But it’s never too late to start to make a plan. Yes, you may have to dial back your expectations of what your retirement would look like. You may even have to delay retirement altogether. Some seniors are finding that they really don’t want to be “fully retired” at the age of 62, 65 or even 70.

There is no “right” answer to how much you have to save. What a comfortable retirement is for you may not be the same for others. The key is to start saving as early as possible and continue to save regularly. And by all means, use the services of financial professionals to help put you on the best path to help you meet your retirement goals.