Social Security is a major source of retirement income for a lot of older Americans. And for some people, those benefits constitute their sole source of income.
You may be planning to largely retire on Social Security yourself. But when you see what the average senior will be collecting in benefits this year, you may decide to change your tune.
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What the average annual benefit looks like now
In 2024, seniors on Social Security are getting a 3.2% cost-of-living adjustment (COLA) to account for inflation. That's going to result in an average monthly benefit of $1,907. When we multiply that by 12 months, we get an average annual Social Security income of $22,884.
Now to be clear, Social Security benefits have a tendency to rise over time, since they're eligible for annual COLAs. So if you're someone in your 30s or 40s, by the time you reach retirement age, the typical annual Social Security benefit may be a lot higher than $22,884.
However, living costs are also apt to be a lot higher at that point, too. So all told, you're not necessarily gaining anything financially with a larger average benefit.
Don't resign yourself to a cash-strapped retirement
You may be surprised to learn that the typical Social Security recipient this year is only in line for $22,884. And if that seems like a shockingly small amount of money, well, it is.
One big misconception about Social Security is that the benefits it pays will replace workers' salaries in full. If you're an average earner, you can expect the benefits Social Security pays you to replace about 40% of your preretirement wages. This assumes, however, that Social Security benefits aren't broadly reduced in the future. That's a distinct possibility at this point in time, given the state of the program's finances.
Since living on Social Security alone could mean having to really cut corners and struggle financially as a retiree, you may want to take steps to avoid that fate. And the easiest way to do that is to build up a nest egg, whether by contributing to an IRA you manage yourself or signing up for your employer's 401(k).
If you put $400 a month into a retirement savings plan starting at age 40 and end up retiring at age 67, which would be the age when you're entitled to your full monthly Social Security benefit based on today's rules, you'd end up with a nest egg worth around $419,000, assuming an 8% average annual return on your investments. That's a bit below the stock market's average, so it's a reasonable assumption for a 27-year savings window.
Of course, you could just tell yourself that you'll reduce your spending in retirement so you don't have to part with money for your IRA or 401(k) today. But doing so might result in a pretty miserable existence once retirement rolls around. So for the sake of your future self, set yourself up to not have to rely on Social Security benefits alone.
