By being proactive about saving for retirement, you can reduce your dependence on Social Security in retirement.
Social Security is an important part of millions of Americans’ retirement plans and finances. For some people, Social Security is a “nice-to-have” source of income. For others, it’s most or all of their retirement income.
Unfortunately for those who fall into the latter category, Social Security has begun to lag behind the increasing cost of living in the country, causing some to consider returning to the workforce.
If you are in your golden years and decide to go back to work, it should be because you want to do it, not because your financial situation forces you to do so. But things happen in life, and sometimes they are unavoidable.
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Social Security COLAs are valued, but they’re not enough
To offset the effects of inflation, Social Security offers an annual cost of living adjustment (COLA). In an ideal world, this annual COLA would offset inflation, but for many people, that’s not the case.
The COLA starting in 2025 will be 2.5%, the lowest since 2021 and below the 3.75% average since COLAs became annual in 1975. A recent Motley Fool survey found that 54% of retirees believe the new COLA is insufficient, and half are considering returning to work due to lower Social Security benefits.
As for what beneficiaries are dealing with here, here are the current average monthly benefits for ages 62 to 70 (the age range in which you can claim Social Security) and how they average when taking COLA into account. Here’s what happens:
Age Current average monthly benefit COLA average monthly benefit 62 $1,274 $1,305 63 $1,365 $1,399 64 $1,411 $1,446 65 $1,504 $1,541 66 $1,719 $1,761 67 $1,844 $1,890 68 $1,848 $1,894 6 9 $1,818 $1,863 70 $1,963 $2,012
Data source: Social Security Administration. Benefit amounts are rounded down to the nearest dollar. Table by author.
COLA-adjusted average benefits are not set in stone and change based on new claimants and other population changes, but this is a sign of how modest and restrictive COLAs are for some retirees. It is embossed.
If possible, delay filing your Social Security claim for as long as possible
The most direct way to guarantee higher monthly Social Security benefits is to delay claiming benefits as much as possible. Full retirement age is the age at which you are eligible to receive a basic monthly benefit (known as the main sum assured), but you can claim before or after that age.
Here’s your full retirement age based on your year of birth.
Data source: Motley Fool.
If you decide to delay benefits beyond full retirement age, your monthly benefit increases by two-thirds of 1% each month, or 8% each year, until you reach age 70. If your full retirement age is 67 and you defer benefits until age 70, you can expect your monthly benefits to increase by about 24%.
For some people, waiting until age 70 isn’t practical because they need benefits to support their retirement. That’s understandable. However, if you are able to survive on other sources of income, it may be worth considering deferring to secure a higher monthly benefit.
Attacking retirement savings from different angles
The best way to compensate for low Social Security benefits is to be proactive and secure multiple sources of income in retirement. This may be easier said than done, but it’s important to make sure you’re not completely dependent on Social Security.
401(k)s are the most popular source of retirement income other than Social Security, but they’re only offered through employers, so not everyone has access to them. An IRA, on the other hand, is relatively easy for anyone to open.
There are two main types of IRAs: traditional and Roth, each with unique benefits and tax breaks. Contributions to a traditional IRA may be tax deductible in the year you make them, but you’ll have to pay taxes on the money you withdraw in retirement. Roth IRA contributions are not tax deductible, but they can be withdrawn tax-free in retirement.
In an ideal world, you’d put your money in a retirement account, invest it in a brokerage account for retirement, and Social Security would provide supplemental income. Again, this is easier said than done, but it is possible.
Even if you don’t think you need to contribute much to your retirement or brokerage accounts, don’t underestimate the power of small, consistent investments. The compound interest effect rewards people for their consistency and willingness to start stashing money away early.
