Can You Retire on Just Social Security?

Can You Retire on Social Security Alone?

If your expenses are low and you have a sufficient Social Security benefit, it might provide all the income you need—but there are a lot of moving parts to consider. That includes:

• Your retirement lifestyle: Will Social Security provide enough to maintain your lifestyle when you're no longer working? There also may be things you hope to do once you're no longer working. If your dream retirement includes luxury travel or expensive hobbies, for example, you'll likely need more.
• Your age: The longer you delay your Social Security benefit, the more you'll get. Those who retire early may also have higher health care costs in retirement. You're not eligible for Medicare until you turn 65, and the average monthly health insurance premium for a 55- to 64-year-old was $771 in 2021, according to eHealth data.
• Your benefit amount: Your earnings and how long you worked both affect how much you'll receive in Social Security benefits. The Social Security Administration provides calculators to help people make their best estimate.

How Is Social Security Calculated?

The most important factor in your benefit amount is how much you earn during your working years. The Social Security Administration will adjust the amount of your earned wages based on how the average wage has changed since the year you began paying Social Security taxes.

After that, they'll calculate your average monthly earnings during the 35 years that you earned the most. Then they'll apply a formula to your earnings to determine your basic benefit. This is how much you'll receive at your full retirement age. You can log in to your Social Security account at any time to see personalized retirement benefit estimates.

How Much Social Security Will You Get in Retirement?

There are a few different factors that will affect how much Social Security you'll get in retirement. That includes:

• The age you begin taking your benefits: You'll receive a reduced amount if you start collecting Social Security before your full retirement age, which is 67 for folks born after 1959. However, continuing to wait beyond your full retirement age has its perks. The amount you'll receive increases by 8% for every year you delay claiming your benefit (up to age 70). No matter when you start taking Social Security, you'll receive an annual cost-of-living increase based on inflation.
• Whether you're a government worker with a pension: If so, the Social Security Administration may use a different formula to calculate your benefit amount. This also applies to those who are eligible for a retirement or disability pension for which they didn't pay Social Security taxes.

How to Save for Retirement

The amount you'll receive in Social Security benefits can vary, which is why it's important to build your own nest egg for retirement. Here are some primary ways to save for retirement.

Contribute to a 401(k)

A 401(k) is an employer-sponsored retirement account with tax advantages. The money you put in during your working years is paid out as income during your retirement. Your employer might also match some or all of your contributions. Because 401(k) contributions aren't taxed when you deposit them, you'll be taxed on withdrawals you make in retirement.

In 2023, you can contribute up to $22,500 to a 401(k) account. If you're 50 years of age or older, you can put in up to an additional $7,500 as a catch-up contribution. Pulling money out before age 59½ typically triggers a 10% early withdrawal penalty.

Kick Into an Individual Retirement Account (IRA)

An IRA is a retirement account you can open and fund yourself. You can contribute up to $6,500 across all your IRAs in 2023. Taxpayers who are 50 and older can deposit an extra $1,000. There are two main kinds of IRAs:

• Traditional IRA: Your contributions may be tax-deductible and you won't pay taxes until you begin taking distributions in retirement. Like a 401(k), you'll likely be penalized for tapping your funds before age 59½.
• Roth IRA: This type of IRA is funded with after-tax dollars. That means you won't be taxed on distributions you take in retirement. However, there are income eligibility limits. In 2023, married couples filing jointly cannot contribute to a Roth IRA if their income exceeds $228,000. For single filers, that number drops to $153,000.

Consider a Health Savings Account (HSA)

You can open and use an HSA during your working years. The money you put in is tax-deductible and your earnings will grow tax-free. What's more, you won't be taxed on withdrawals that are used to cover qualified medical expenses. You must have a high-deductible health plan to qualify. In 2023, you can contribute up to $3,850 for a self-only health plan; $7,750 for a family plan.

HSAs have one other notable benefit: Once you turn 65, you can use those funds for whatever you want—including retirement income. You'll just be taxed on distributions that aren't used for qualified medical expenses.

Think About Permanent Life Insurance

With permanent life insurance, your loved ones will receive a death benefit after you're gone. But while you pay your premiums throughout your life, your policy will also accumulate a cash value that earns interest over time. You can draw on this money for retirement income. Just know that doing so may reduce your death benefit.

The Bottom Line

Social Security can be a significant source of guaranteed retirement income, but it may not be enough to fund your lifestyle. Building your own nest egg can help supplement your income when you're no longer working. That may involve saving in a 401(k) or other retirement account.

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