How to factor in Social Security benefits when saving for retirement

Whether you’ll have a big enough nest egg to retire comfortably depends not only on how much you save and invest over time but also, for most working Americans, on how much you’re likely to get in Social Security benefits.

Whether you’ll have a big enough nest egg to retire comfortably depends not only on how much you save and invest over time but also, for most working Americans, on how much you’re likely to get in Social Security benefits. Even if the benefits alone are not sufficient to provide a comfortable retirement for most people, they are still an essential income source. Today, on average, Social Security benefits may replace about 40% of a person’s pre-retirement income assuming they start collecting benefits at their full retirement age. But that replacement rate may be much higher for low-income career earners or it may be much lower (eg, 28% to 35%) for those “high” or “maximum” earners. To be in those categories your earnings are often at or near the annual maximum income subject to the Social Security payroll tax. That income threshold goes up every year. This year, the tax applies to the first $168,600 of a person’s salary. To anyone who discounts just how valuable Social Security benefits are for everyone, ask yourself how much you would need to save to replicate the same income stream, said certified financial planner Mari Adam, who specializes in women and money issues. For example, if a married couple expects to get $40,000 a year from Social Security, it could take $1 million in assets to replace that benefit, assuming you plan to withdraw roughly 4% a year from your portfolio. If you had to replace $24,000 in Social Security benefits, you might need a $600,000 portfolio. Of course, there are less conservative withdrawal strategies you could adopt, which would lower the total savings you’d need to match Social Security’s income stream. Or you can probably buy an annuity to generate that income for less than the amount you’d need using a conservative withdrawal strategy. But in all cases, Adam said, “The point is it takes a lot of money to replace that benefit.” If you have no idea what Social Security benefits are promised to you under current law, get an official estimate based on your average career earnings to date from the Social Security Administration. The estimate will be revised annually based on your latest earnings. And you should always check that your earnings are correct.