Dan Curtis expects Social Security to be his largest source of retirement income. The 52-year-old patient advocate for a health insurance company has a few thousand dollars in a 401(k), but finds it difficult to save on a salary of $38,000 a year, before taxes, in Minneapolis. He is also paying off $20,000 in student loan debt and providing child support payments for his two children. "My retirement future feels pretty uncertain," he says. "If I could make another $10,000 or $12,000 a year, I could probably put some money away."
While it's generally a good idea to supplement your Social Security income with a traditional pension or personal savings, millions of people count on Social Security as their primary source of retirement income. Just over a third (34 percent) of retirees age 65 and older got 90 percent or more of their retirement income from Social Security in 2008. And the majority of retirees age 65 and older (64 percent) get at least half of their retirement income in the form of a Social Security payment.
Getting by on Social Security alone or with a small amount of savings will generally require some cost-cutting. The average monthly Social Security check was $1,178.80 in March 2011. A duel-earner couple each receiving the average benefit would receive just $28,291.20 annually, which would be adjusted each year for inflation. Here's a look at how you can still retire when Social Security is your primary source of retirement income.
Maximize your benefit. If Social Security is going to be your biggest source of retirement income, you want to boost your benefit as much as possible. Your highest 35 earnings years are factored into your Social Security payout. Getting raises, working a second part-time job, or even delaying retirement could boost your benefits because higher-earning years later in your career will cancel out years in your teens or twenties when you didn't earn as much. Your payout also varies based on the date you first sign up for benefits. "If you can wait until your full retirement age rather than taking it at age 62, oftentimes, depending on your health and longevity, that is going to be much more advantageous," says Kathryn Nusbaum, a certified financial planner for Middle America Planning in Pittsburgh, Penn. Your payment will increase for each year you delay claiming between ages 62 and 70.
Test out a smaller budget. Get an estimate of how much your Social Security payments will be at the age you plan to retire, and practice living on that amount before you actually leave your job. "The people who seem to weather it the best are those individuals who go into it intentionally understanding that they have to live within their means," says Nusbaum. "You will not be getting a new car or going on fancy trips, but maybe a trip to the Olive Garden with a coupon." To live on this new, likely smaller, budget you will need to eliminate as many expenses as possible, including your mortgage, car loans, and credit card or other debt. Some people also start gardens to reduce food costs, cancel unnecessary or duplicative TV and phone services, and begin to find low-cost or free entertainment. "Discretionary spending, like entertainment expenses, is going to need to be whittled as much as possible, so it's free concerts and the public library," says Jill Gianola, a certified financial planner and owner of Gianola Financial Planning in Springfield, Ohio.
Minimize your housing expenses. Paying off your mortgage eliminates one of your biggest expenses and will allow your limited budget to stretch much further in retirement. You can also control your housing costs by downsizing to a smaller home or a more inexpensive neighborhood and pocketing the price difference. In some cases, you can also lower your property tax bill or maintenance expenses by moving to a smaller abode.
Tap your home equity. Homeowners have a built-in emergency fund if unexpected expenses occur in retirement. "If you own a home and there is equity in it, you can always have that to fall back on," says Nusbaum. Retirees who are at least age 62 with no mortgage or only a small mortgage left to pay off may be eligible for a reverse mortgage. This type of loan generally does not require repayment as long as you continue to live in that home for the rest of your life, keep up the house, and pay the property taxes. However, if you later wish to move, you must repay the lender the principal value of the loan, plus interest and fees. And only the equity remaining in the home after the loan is completely repaid will be passed on to your heirs.
Continue to work. Even a small amount of extra income could make you much more comfortable in retirement. "Even if you cannot continue at the job that you had, certainly look into part-time work to supplement your income for a few years," says Gianola. "The best solution is to try to get some sort of a paycheck for a few more years, because it will allow you to stash away some extra money." You can work and claim Social Security benefits at the same time, but if you claim early and earn too much, some of your benefit will be temporarily withheld. Workers under their full retirement age, which is typically age 66 or 67, can earn up to $14,160 without penalty in 2011. "If you are 62, you could get a part-time job making $10,000 or $12,000 a year and still get your Social Security checks," says Gianola. After that, 50 cents of each dollar you earn will be deducted from your Social Security payments. The year you reach your full retirement age, the earnings limit jumps to $37,680 and the penalty is decreased to 33 cents withheld from each dollar you earn above the limit. After your full retirement age, there is no reduction in your payments for working and receiving benefits at the same time.
Consider your children. Some older adults move in with their children or other relatives to cut costs for both parties. "Some children are buying homes that have a mother-in-law suite and the parents are selling their homes and turning over the proceeds to the child," says Gianola. Approximately 49 million Americans lived in a household that contained at least two adult generations in 2008, up significantly from 28 million people living in multigenerational households in 1980, according to a Pew Research Center analysis of Census data. Curtis wonders if he will one day need help from his two children, who are currently ages 10 and 15. "I have no idea if they will ever be in a position to help me or their mother if we needed it," he says. "I'm not really a person who wants to need to be helped."