Social Security is an important source of income for many retirees. And many
people’s retirement
plans would be a lot more precarious without those benefits.
But people who expect to retire on Social Security alone may be in for an
unwanted surprise. Not only are benefits facing potential cuts, but Social
Security was never meant to serve as retirees’ only source of income.
Shark Tank’s Kevin O’Leary warns that seniors who are behind on savings going
into retirement need to get serious about changing their ways or otherwise risk
a harsh financial reality once their work-related paychecks stop.
Why Social Security alone may fall short
One big misconception about Social Security is that it’s possible to retire
comfortably on those benefits because they’ll replace most or all of your
paycheck. But you should know that if you earn an average wage, Social Security
might only take the place of about 40% of your pre-retirement earnings.
That also assumes that benefits are able to be paid in full. Social Security is
facing a major financial shortfall that could result in a 22% benefit cut as
early as 2032. If that happens, you can expect those monthly checks to replace
an even smaller percentage of your former wages, which could make it much more
difficult to cover your costs in retirement.
Many financial experts recommend having enough income in retirement to replace
70% to 80% of your former paycheck. So even if Social Security does not undergo
cuts, you should still expect to need supplemental income to be able to maintain
a decent standard of living.
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Why personal savings matter more
The average monthly Social Security benefit for retirees today is about $2,084.
On an annual basis, that’s roughly $25,000.
Kevin O’Leary says that the average Social Security benefit is not enough to
sustain the typical retiree. So he strongly recommends making changes in the
years leading up to retirement if you’re behind on building savings. And some of
those changes may have to be extreme.
“Radically cut down on all your expenses. Lose the car. Lose the cable. Maybe
even lose the cat. You’re in an emergency,” O’Leary has been quoted as saying.
“You have to look at every expenditure with a critical eye and make tough
decisions about cash flow.”
O’Leary specifically says that the five- to seven-year period leading up to
retirement is crucial for savings, and that it’s a good time to practice living
frugally. If you take action at that point, you may have enough working years
ahead of you to build substantial savings if you’re behind.
Why passive income matters in retirement
While saving money for retirement is a great way to supplement your Social
Security checks, simply putting money into an account like an IRA isn’t enough.
O’Leary has long been a fan of building investment portfolios that generate passive
income. And he thinks that’s the right approach to take to retirement savings.
“What piece of advice do I give my kids over and over and over again about
money?” O’Leary said, as reported by Fortune. “Don’t spend it. Save it. Invest
it. Let it compound. That’s the gift the market gives you.”
If you buy assets like dividend stocks or ETFs (exchange-traded funds) that can
generate income, you can then earn income on that income through compounding.
Plus, your shares themselves might gain a lot of value through the years.
If you follow this strategy to build a large nest egg passively, you may find
that you have enough income to support yourself in retirement, even if Social
Security does end up having to cut benefits.
Why starting early makes a difference
O’Leary’s advice to build savings through passive investing is smart. But to
really put it to good use, it’s important to give your money plenty of time to
grow.
An IRA you first start funding at age 45 might only have 20 years to grow if you
want to start withdrawing from it at 65. But if you begin funding that IRA at 25
years old, you’ll have a 40-year window to grow wealth.
To highlight what a difference that might make, let’s say you invest $5,000 for
retirement at age 45 and your portfolio generates an 8% return each year. By age
65, your $5,000 could be worth about $23,300. But if you give that $5,000
investment 40 years to grow instead of 20, it could be worth about $108,600,
assuming that same 8% yearly return.
Bottom line
Social Security is one of the most important benefits for
seniors. But the reality is that retiring on it alone is not easy. And if
you go that route, you may end up sorely cash-strapped once you stop working.
The good news is that if you’re still working, you have different tools
available to you to help build retirement savings. In addition to funding an
IRA, you can look to your company’s 401(k) plan. And if there’s an employer
match, that’s a great way to snag free money for your retirement nest egg.
Just as importantly, aim to give yourself as much time as possible to invest for
retirement. The more years your money is able to grow, the less dependent on
Social Security you might be.
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Author Details
Maurie Backman
Most retirees will make their Social Security claiming decision exactly once, which is why Maurie Backman has spent more than 20 years helping them understand it. She covers benefit calculations, COLA forecasts, and the policy changes that quietly reshape what retirees receive each month. Her work has appeared in Kiplinger, The Motley Fool, 24/7 Wall St., Bankrate, and U.S. News & World Report.
