In theory, the maximum possible Social Security benefit in 2021 for someone who retires at full retirement age is $3,148, up 2.6% YoY. However, in order to collect the maximum benefit, you would need to earn the maximum taxable amount for 35 total years.
Given the maximum taxable amount was $142,800 for 2021, this was no easy feat. According to the the U.S. Census Bureau, median household income is only about $68,000 a year in 2021.
Thus, instead of the max $2,861, the average Social Security benefit is roughly $1,543 a month in 2021. Receiving a total of $17,532 in Social Security benefits a year is not enough for a comfortable retirement.
In 2022, the maximum taxable income amount for Social Security is $147,000. The median household income in 2022 is about $76,000. Meanwhile, the average Social Security benefit in 2022 is $1,668. The most someone can get from Social Security if filed in 2022 is $3,345.
Luckily, the cost of living adjustment for Social Security follows inflation.
Calculating The Average Retiree’s Investment Amounts
One of the criticisms from the average retiree spending post is that I didn’t include Social Security as a reason for such high spending, even though I clearly did.
Just so we’re crystal, let’s do some further back-of-the-envelope calculations to see what the average retiree has in his or her investment accounts to be able to afford the average spending when we include Social Security.
If we are to believe the Bureau of Labor Statistics’ data the average retiree spends $45,756 a year, we can estimate the average retiree needs to make $57,195 in gross income using a 20% effective tax rate (high to be conservative).
We then subtract $17,532, the average Social Security benefit, from $57,195 to get $39,663. In other words, $39,663 is the amount of gross income an average retiree must produce from his or her investments to match the BLS data. Or, $39,663 can be viewed as the annual withdrawal rate.
Average Retirement Account Balance
If we use an aggressive safe withdrawal or return rate of 5%, the average retiree with Social Security has about $793,260 in their retirement accounts ($39,663 / 5%). Not bad.
If we use a historically safe withdrawal rate of 4%, the average retiree has $991,575 in investments ($39,663 / 4%). We’re now close to $1 million, a aspiring retirement net worth number for many.
If we use an even safer withdrawal rate of 3%, which is probably more appropriate in this low-interest rate environment, then the average retiree has $1,322,100 in investments ($39,663 / 3%).
The average retiree having $793,260 – $1,322,100 in investments is a healthy range. In other words, the average retiree who collects Social Security is also a millionaire.
This amount also explains some of the pushback in terms of why the average 401(k) is so low.
One savvy Financial Samurai commenter writes,
“Americans move around a lot more from job to job these days, meaning they are creating a lot more brand new 401ks each year. Most people don’t roll their 401k balances to their new 401k when they change jobs; they instead roll them to IRAs.
Retirees with the largest balances also inevitably roll their 401ks to IRAS when they retire – meaning the average and median 401k balances will always remain skewed to the low end.
Not to mention the fact that many households have several. My husband and I have six retirement accounts between us. My Roth IRA, his Roth IRA, my 401k, his 401k, our HSA, and his old 401k which we left at a previous employer due to the fact that they charge no expense ratios on their index funds. Our total retirement savings are much higher than our average balance would imply.“
Calculating Company Pension Contribution In Retirement
To be thorough, let’s also look at how pension benefits affect the investment amounts for the average retiree.
In the past, pension benefits provided income to nearly one-third of older American retirees. Today, only about 23 percent of American workers have a pension, a percentage that is in continuous decline according to the Pension Rights Center.
In 2016, the median pension for adults over 65 who worked in the private sector was worth $9,262 a year. The median federal government pension, meanwhile, was $22,172, and for state and local government pensions, it was $17,576, according to the Pension Rights Center.
For those who spent their career working at the state government level, for example, the average pension benefit is $36,131 a year, according to a 2014 report from the American Enterprise Institute.
Given about 86% of the workforce work is in the private sector, let’s assume the approximate median pension amount is $12,000.
Now let’s do the same calculations again to figure out what the average retirement account balance is for those who are able to collect both Social Security and a pension.
Pension + Social Security Retirement Calculation
$57,195 (average gross retirement spending) – $17,532 (average SS benefit for 2021) – $12,000 (median pension) = $27,663. In other words, the average retiree who is able to collect both Social Security and a pension has to come up with $27,663 a year from his or her investments.
If we use a more aggressive safe withdrawal or return rate of 5%, the average retiree with Social Security and a pension has about $553,260 in their retirement accounts. A reasonable amount for the average middle-class person.
If we use the historically safe withdrawal or return rate of 4%, the average retiree with Social Security and a pension has about $691,000 in their retirement accounts. Withdrawing at 4% is aggressive nowadays since the risk-free rate has declined since the 1990s. Further, expected returns for stocks and bonds are set to come down.
If we use a 3% withdrawal or return rate, the average retiree with Social Security and a pension has about $922,000 in their retirement accounts. Ironically, withdrawing at a lower rate boosts the value of one’s Social Security plan.
Having $553,260 – $922,000 in investments after the age of 65 is still quite a healthy amount. Now, of course, this retirement amount is much higher than what other research has reported. However, if we are to do the math based on BLS research and standard retirement calculations, $553,260 – $922,000 is quite reasonable.
Your Goal Is To Live As Long As Possible Once You Start Collecting Social Security
Despite a lot of noise about how dire the American retirement savings figures are, there is a dearth of stories about how millions of Americans are suffering in retirement every day. Why is this?
If the median retirement savings in American was really only $5,000 and the average retirement savings was really only $100,000, we’d have a humanitarian crisis!
The only logical reason to explain the difference between research figures and reality is that Americans have much more money than people think. We practice stealth wealth, especially from research institutions who ask us how much we have. We’re also resourceful and take action if money is needed.
Making Up For Social Security’s Shortage In Retirement
Due to perennial government mismanagement, I’ve never counted on Social Security being there for me. I view the FICA tax as part of my civic contribution to help support my elders who helped develop our country into what it is today.
But whenever the topic of Social Security comes up, it is a nice reminder there’s a possibility I might get as much as $3,000+/month in “extra benefits” once I’m old enough to collect. If blessed, I’d like to use this bonus money to spoil my grandchildren at the amusement park.
The onus is on all of us to save for our own retirement through pre-tax and after-tax savings. Currently, workers under 50 can sock away up to $19,000 a year in an employer-sponsored 401(k), and $6,000 a year in an IRA. There are also catchup contributions for workers over 50.
Earn Supplemental Retirement Income Or Work Longer
The easiest way to ensure you’ll have enough in retirement is to simply keep working. Yes, at the present time, you can collect Social Security benefits as early as age 62. But if you start collecting at 62, you will only get 75% of your full potential benefits. You can also pick up some side hustles in retirement to help bridge the gap.
It is only after you turn 66 or 67, depending on your birth year, that you are eligible to receive full Social Security benefits. Then, for each year after that you delay collecting Social Security benefits until age 70, you gain an 8% permanent boost that remains in effect for the rest of your life. Therefore, stop eating so much sugar and start exercising more.
You don’t necessarily have to work while you wait to earn maximum Social Security benefits. But working does do wonders for your retirement accounts. For each additional year you work, you are not only boosting your retirement savings and Social Security benefits, you are also delaying one year of withdrawals.
View Social Security Like A Lottery Ticket
The chances of you winning the lottery are slim-to-none. Therefore, as soon as you view Social Security as a lottery ticket, you’ll do better securing your own retirement future based on what you can control.
If Social Security is there to be collected, then wonderful. If not, you never counted on it in the first place.
The American government has asked me to thank you for contributing into their underfunded and mismanaged national pension system. But without our forefathers, we’d be nowhere, so pay up!
Related: When Is The Best Time To Take Social Security?
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I am 65 years old now, still employed – will be eligible for Social Security when I will be 66 and 4 months. I was told that while I have enough credits, I do not have enough YEARS worked in the US (only 24 years).
But I have 10 years OFFICIALLY in Canada (1986-1996) and previous 15 years in Czechoslovakia – can it be somehow transferred – so I will get bigger Social Security benefits here in the US?
Thanks for another interesting article Sam. Coming late to the party, I’ll contribute my own experience with Social Security. I’ve been retired for 25 years and my wife and I have been on SS for the past 15 years. I lost my own pension as a result of a divorce and my second wife lost her annuity due to a company bankruptcy. Too complicated to explain here, but stuff happens along the way in life, regardless of age.
We live comfortably on $3000-$4000 a month now, even though my income was in the top five percent when I was a college teacher in 1960-1990, with extra income from a small travel business I owned. Social Security is the base now ($2300 a month together), plus $700 from High Growth Dividend Paying Stocks, and I Bonds ($100,000) as a nest egg, which we use for emergency and vacations. The other big contribution…working on a seasonal basis of about 2-3 months a year. (Think of Amazon, Costco, State Parks, etc.)
We’ve had it all…big house in gated community, do dads, 15 minutes of fame and fortune, three advanced degrees, etc. Retired at age 56, and at age 65, we sold everything to start all over again. Got another’s MA degree in ESL, worked and traveled for 12 years overseas, USA and Canada. So with $200,000 of net worth from a million or more at one time, we are doing very well. We’ve done it all. No complaints. Despite all the pessimism out there, I have no doubt Social Security will be there for Americans now and in the future regardless of aberrations like Trump. And, we live quite well on $200,000 for our nest egg. In our 80’s now we still travel with our converted van about five months out of the year, live on a golf course in our small but cozy apt, and enjoy the outdoor life in Oregon. It’s nice to have two million or so, but not necessary. One thing I learned that I’ll pass on: “It’s the journey and not the destination.”
Do these numbers for the average annual spending in retirement hold true for married couples? If not, is there a significant difference?
Prost!
Chris
Our three-legged stool is Pensions, Qualified Savings & Non-qualified Savings. I turn 62 this year and my wife turns 58 so we may have some chance to see SS payments, even if they are reduced. Perhaps our stool can turn into a chair with the 4th leg added.
I found this:
“Social Security makes up a majority of cash income for 61% of elderly beneficiaries, and a third rely on this benefit for 90% or more of their income, according to the Center on Budget and Policy Priorities.”
Somehow I can’t help but visualize Edvard Munch’s The Scream, every time i read that.