Social Security can help you pay for expenses in retirement such as groceries, housing, utilities and transportation. It can give your budget some breathing room and allow you to leave more money invested in stocks and bonds to grow over time.
But this plan is not meant to be your only source of income in retirement. It replaces about 40% of annual pre-retirement earnings on average, according to the Social Security Administration. That means you’ll need to plan how to deal with rising costs through additional income streams and savings.
Social Security is an income, not a comprehensive retirement plan
Your monthly budget should not be based entirely on your profit. If you receive $3,000 a month in Social Security, you may need to spend more than $3,000 a month to keep up with living expenses. Even if you take into account the cost of living adjustment (COLA), your Social Security benefits will likely not be enough to cover your retirement.
These benefits can cover some of your essential expenses, but there will be a gap. A retirement plan can fill the gap and leave you with extra money so you don’t have to worry about money. Part-time work can be a good idea if you don’t have enough money to cover your expenses.
Create a budget with the expenses you have to pay first
When budgeting, think about your non-negotiable expenses, or those that you cannot cut. You cannot deduct expenses related to housing, utilities, insurance premiums, groceries and transportation. You will also have to pay taxes and any applicable debt payments.
There are ways to reduce each of these costs. Slowing down, walking, walking or biking instead of driving if you can, getting higher deductibles and cooking at home can lower your costs. Housing is often a big expense, so focusing efforts to free up your budget on that line item can help.
Once you’ve come up with a negotiable fee, you can review discretionary spending. Look for ways to limit how you spend money on things you choose, such as entertainment. The library offers many services that can replace monthly subscriptions. You can also exercise with home equipment instead of paying for a gym membership.
Use savings systematically to fill gaps
Retirement plans can fill the gap left by Social Security. After you get your government paychecks, you can tap the 401(k) and retirement accounts (IRAs) you’ve contributed to during your career.
If you have multiple retirement accounts, it’s important to withdraw from them wisely. For example, withdrawing from tax-deferred accounts each year can reduce your balance when minimum distributions (RMDs) begin, which can allow you to lower your tax liability later in retirement. Retirees can balance tax-deferred account withdrawals with Roth IRA withdrawals, which are tax-free.
Ideally, you’ll keep some money in stocks and other assets to help your money grow over time and outpace inflation. However, you’ll also want to keep some cash on hand for unexpected expenses like car repairs, dental work and home maintenance. Staying on top of your finances and reviewing your spending every month can help you prepare for the unexpected instead of being caught off guard. If you’re not sure how to withdraw strategies from your accounts or how much money you should have in retirement savings, you may need to talk to a financial planner.
