One of the mistakes that people sometimes make as they prepare for retirement is assuming that Social Security alone will be enough to support them. For many people, Social Security should be viewed as a supplement to other sources of retirement income rather than the cornerstone of revenue during these decades.
Some individuals may be able to live on Social Security alone in retirement. However, accomplishing this feat takes a great deal of planning prior to stopping employment, not to mention sacrifices while retired. The keys to relying on Social Security involve maximizing the benefit while minimizing monthly expenses.
Some tips for people who want to use Social Security as a primary means of income during retirement include:
1. Think about cost of living.
People who need their Social Security checks to stretch as far as possible need to consider cost of living. Sometimes, individuals will need to relocate to a different part of the country or move out of an urban area to reduce cost of living enough to make ends meet.
Other times, the better option is purchasing a more modest home in the same area. A smaller home helps minimize property taxes, utilities, and other expenses. When individuals live in an expensive place as they retire, it may make sense to cash out on a home and exchange for something cheaper, which could also provide some financial cushion moving forward.
2. Pay off all debt.
For virtually anyone thinking about retirement, high-interest debt is a bad idea. Everyone should work diligently to pay off credit cards and other high-interest debt before retiring. This is especially true for people depending heavily on Social Security.
People in this camp may also want to pay off their mortgages. Traditionally, low-interest debt is seen as an acceptable expense, but people depending on Social Security alone need to reduce monthly expenditures. Housing is usually the biggest expense for retirees, so paying off a mortgage makes it more feasible to live on a small budget. Without a mortgage, housing costs include only taxes, utilities, and repairs.
3. Delay Social Security payments.
One of the most important aspects of living on Social Security in retirement is maximizing the payment. People get the highest payments if they delay claiming the benefit to age 70. Beyond that age, there is no benefit to delaying payments in terms of getting a percentage-based boost to the monthly total.
Baby Boomers can increase their monthly payments by 32 percent if they start claiming at 70 rather than at 66. Part of the importance of maximizing the Social Security from the outset is that this boost gets compounded through annual inflation adjustments, which are calculated as a percentage of the current payment rather than a static increase.
4. Pay attention to taxes.
Retirees sometimes assume that Social Security payments are not taxed. After all, individuals paid into this system through the taxes they faced while working. People who rely solely on Social Security will not likely need to pay taxes since they only need to be paid when individuals exceed a certain annual earnings threshold.
However, it is important to keep taxes in mind in years when another source of income might become available, such as new, part-time employment or sold investments. These additional sources of income can trigger unexpected taxes. Individuals can earn up to $25,000 and couples up to $32,000 before they will need to start paying taxes.
5. Maximize the survivor benefit.
Couples benefit from two Social Security incomes during their retirement years, which makes it more feasible to live on this payment alone. However, this situation changes when one spouse dies, so it is important to plan appropriately for this event.
Under current law, the surviving spouse receives a payment equal to the larger of the two Social Security benefits. What this means is that couples may sometimes need to accept a lower payment for one of the individuals if it means having the ability to delay claims for the higher earner. Since Social Security benefit is based partially on income level, the higher earner will have the larger payment, so it is important to focus on maximizing this payout.
6. Reduce monthly expenditures.
While housing is the most expensive monthly payment for the majority of retirees, other expenditures can add up quite quickly. People on a limited income need to take inventory of monthly expenses and see where they can cut costs. Often, individuals can cut food bills by cooking more often and buying in bulk. Likewise, retirees need to remain diligent about controlling utility costs so that their bills are not too high.
Transportation costs should also be taken into account. Using public transportation can often reduce monthly expenses if individuals live in areas with good access. When couples own two vehicles, it often makes sense to sell one of them. Furthermore, people should look at expenses like cable to see if getting online service can reduce their bills.