The Real Cost of Living on Social Security Alone vs $500K in Savings
Social Security offers many retirees a valuable income stream in retirement, but relying exclusively on this government program to stay afloat is extremely risky.
You should still save and invest regularly, leading up to the day you retire. Achieving this requires staying focused on long-term financial goals for multiple decades instead of spending too much money on non-essential items.
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High living costs make it more difficult to save a higher percentage of your paycheck, but it’s well worth it. Even if you can invest an extra $10 per month, it is a good starting point that can gradually boost how much of each paycheck you save.
This guide will analyze how $500,000 in savings changes the retirement picture instead of relying on Social Security.
Social Security Isn’t Supposed To Replace Your Income
Social Security was never intended to replace your pre-retirement income. If you want to stay afloat with the same living expenses, you either have to make some meaningful cuts or tap into another funding source, such as a high-yield savings account or a retirement portfolio.
“The biggest misconception retirees have is thinking that Social Security is a retirement plan,” Susan Espinosa, the Vice President of Member Experience at Skyla Credit Union, told MoneyLion. “It was never designed to be that. The average benefit hovers around $1,900 a month, and for most people, that doesn't come close to covering pre-retirement expenses. When that's your only income, there's no room for error. One emergency and you're either going into debt or going without something else.”
Someone who receives $1,900 per month from Social Security may have to move out of their neighborhood and downsize into a more affordable home further away from the city. That decision can give a $1,900 monthly benefit more room to run, but it’s not much breathing room. Then, if the Social Security recipient has an emergency fix, like necessary car repairs or a hospital visit, there is no financial flexibility.
How Building Your Savings Offers More Flexibility
Building your savings to $500,000 before retirement introduces more financial flexibility. Following the 4% withdrawal rule, a retiree can safely access $20,000 per year, or approximately $1,670 per month. Some high-yield savings accounts offer more than 4% APY, and you can also put some of that money into the stock market to boost your returns, as long as you won’t need those funds for multiple years.
If you combine $1,670 per month with a $1,900 benefit, you end up with $3,570 per month in money to spend. Emergency expenses are still frustrating, but it’s easier to navigate them with $500,000 in savings that was built over multiple decades. Without those savings, retirement becomes unfeasible for some people.
“A nest egg gives you options, and options are very important in retirement. People who struggle in retirement aren't always the ones who planned poorly; sometimes life just happened to them. When you have savings behind you, a health scare or unexpected expense is stressful but manageable. When you don't, it can be devastating to your financial position,” Espinosa said.
Having $3,570 available each month instead of $1,900 per month can help you stay in your current neighborhood instead of having to move somewhere else. It also makes some local vacations more feasible. That extra nest egg may be a requirement to make retirement feasible in the first place.
Almost no one builds a $500,000 nest egg in one year. It’s something that you get to over time. Although you can’t change how much you invested in the past, you can decide what you will do right now on your path to meaningful long-term financial goals.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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