How much money will I need to retire in 2045? Can I live off of social security benefits alone? We'll answer these retirement questions, and more.

young couple sailing, with text overlay "can you live off of social security alone? retire in 2045Our culture has this obsession with youth.

We shun aging and we are eager to push out one generation and move on with the next. Perhaps this is one of the reasons why people do not save for retirement. If they are convinced through the use of anti-wrinkle creams, botox, and red bull drinks that they will never age or lose their energy, then why would they save for their future?

Besides, Social Security has us covered, right?

Can We Bank on Social Security Being there When We Retire?

Whether or not you will receive all or some of your Social Security benefits depends on your age, tax changes, and law changes. There is a lot of speculation about Social Security that probably leads many of us to just forget thinking about it, just like when science says coffee is bad for you one year, then touts its benefits after new studies several years later. But I can offer you a fact because it is written on the cover letter of my actual Social Security Benefit Statement: “…The Social Security Board of Trustees now estimates that based on current law, in 2037, the Trust Funds will be depleted. Because people are living longer and the birth rate is low, the ratio of workers to beneficiaries is failing. Therefore, the taxes that are paid by workers will not be enough to pay the full benefit amounts scheduled.” This is a direct quote from the Social Security Administration. To be fair, they also state on the front of the cover letter that they will have approximately enough in the trust to fund 76% of their obligations. Still, does this sound like something you can count on?

Again, this depends on your age. If you are nearing retirement then you should be fine. If you are in your 50s, then I you will hopefully receive full benefits and at least partial benefits. Then there is the grey area. I am 36 years old and my target year for retirement is 2045.

In other words, the statement above that I received from the Social Security Administration as a pamphlet with my estimated benefits amount does not leave me feeling warm and fuzzy.

Laws could change, the tax code could (and always does) change, but I am not willing to bank my financial future on Social Security. In fact I am so concerned that I have decided to forget about receiving these benefits all together and rely on myself to save for retirement.

How Much Money Will I Need to Retire in 2045?

I hit a milestone birthday several years ago (30). My 20s — a decade where life mistakes are more forgivable and there is a lot of time to recover from financial mistakes — are behind me and my husband.

As a regular reader, you know that I take finances and particularly retirement savings very seriously. However, after automating our retirement savings and investment allotments, I haven’t paid much attention to the bigger picture in terms of projecting our current savings with the amount we will save each year and figuring out at what age this will allow us to retire (and then adjusting accordingly).

Our Current Retirement Picture

Paul and I each have Roth IRAs that we max out every year. On top of this, Paul has a lingering 401(K) that he cannot contribute to as of two years ago when his company was bought out (which needs to be consolidated into his Roth IRA). I also have a pension at my job that I will be fully vested in after five years of service on December 15, 2012 (if I leave before then, I will not be vested in it at all but I would get my own contributions to roll into my Roth IRA). Overall, we are saving 14.5% of our income towards retirement each month. This sounds great, but how much will we accumulate over time, and how much will we need to accumulate over time in order to retire?

Several Options to Come Up with Our “Number”

Even though Smartmoney.com suggests that having a “number” in mind at which retirement can be achieved is not necessary, I think figuring out an estimate will give us something to shoot for. At this point, we truly have no idea how much we will need in an account before being able to retire. There are many different methods and projections used to come up with the “number”, some of which overlap. I’ve narrowed it down to two below, and then came up with a hybrid approach.

  • The 75% Replacement Rule: If you wish to figure out how much money you need in retirement using a percentage of your pre-retirement income as a gauge, experts state that it is between 70-95% depending on your situation. I used T. Rowe Price’s Calculator, which assumes a 75% replacement rate of our pre-retirement income, to determine that if we continue saving 14.5% of our income each month until the age of 65, then we will have $7,200 in monthly income (includes income from social security, pension and our IRAs). This does not give a large number to shoot for, but rather a monthly income figure to shoot for.
  • The 4% Number: Assuming that you stay invested in the market with a balanced asset allocation (evenly split between large-company stocks and U.S. Treasury bonds) then you can use the 4% rule. According to this rule, in order to have enough retirement income to last you for 30 years you should set aside enough savings and investments that you can withdraw 4% from the first year (adjusted annually for inflation). You can figure out the overall amount you will need, the annual income you wish to sustain during retirement, or both using the 4% rule. For example, if you have $1,000,0000 invested in the market, then you can withdraw an income of roughly $40,000 per year for roughly 30 years. On the flipside, if you want an annual salary of $60,000, then you know you will roughly need $1.5 million in investments by the time you retire (4% of $1.5 is $60,000, or $5,000 per month).
  • A Hybrid Approach: In order to achieve the 75% in pre-retirement income from the replacement rule above, and in order to withdraw only 4% annually from our investments to ensure that they last us roughly 30 years into retirement, we would need to have investments of $2 million before entering retirement (forgive me while I pull myself back up from the floor!).

Choosing Our Ultimate Number: Lots of Variables Involved

Aside from different calculation methods with varying outcomes, there are other variables involved when planning for retirement. These include whether or not you will have a mortgage, having children early on in life versus late in life when they could be in college around your age of retirement, medical conditions/life expectancy, unforeseen events, investment returns, whether or not you plan on working part-time at a hobby or passion job, inheritances, what age you want to take Social Security, lifestyle inflation, etc.

My husband and I plan on having our mortgage paid off before retirement (we refinanced to a 15-year mortgage earlier this year), but are unsure of kid(s). I also know that we are the type to probably earn some kind of money in retirement as a hobby/passion (like Frugal Confessions!). While we are frugal, we do love to travel, so the two may cross each other out in our retirement years.

Given the calculations above and all of the variables involved, I think that it is definitely possible that we will not need 75% of our pre-retirement income to live comfortably, but that we will live close to 30 years into retirement. We will continue saving the 14.5% per month in retirement, look into opening a 401(K) to save more money in, and shoot for $1.5 million+ in investments 35 years from now. With a conservative investment return rate of 4%, I plugged this number into a calculator and found that we need to save $1,344.00 per month in order to reach the $1.5 million goal 35 years from now. We’ve got something to shoot for!

For Those Who are Banking on Social Security Alone

I know that most people are banking on mainly Social Security benefits for the bulk of their retirement income. How do I know this? The Personal Savings Rate by the Bureau of Economic Analysis reached 5.0% in May 2011. This calculation includes contributions to retirement accounts. The personal savings rate is calculated as the ratio of personal saving to disposable personal income. Included in the Personal Savings portion of this calculation are any employer supplements to income (such as contributions to 401(K) plans) and pension contributions. Any contributions that you make during the current month from your income to your individual retirement account (such as a traditional or Roth IRA) is also included as part of the percentage that Americans are saving because it is not included in the disposable personal income part of this calculation. As a side note, this calculation does not include any capital gains realized from investments.

Five percent towards long term and short term savings is not going to cut it for the younger generations if Social Security goes belly-up around 2037. If you turn the cover letter over to your estimated benefits statement, it even gives you instructions to invest and save outside of Social Security, stating that “Financial planners generally agree retirees will need about 70-80% of preretirement earnings to enjoy a comfortable retirement. For an average worker, Social Security replaces about 40% of annual preretirement earnings.” And that is if you receive full benefits!

Take a Look at Your Estimated Benefits

It’s a good idea to know your estimated benefits, especially if it is your plan to live off of them for the bulk of your retirement income. If you do not know where your last Social Security statement is, you can check out this retirement estimator provided by the Social Security Administration (SSA). You may also request a statement at the Social Security website, www.socialsecurity.gov, or call (800) 772-1213. You have to be 25 years of age or older, working, and not currently receiving benefits to get a statement.

A Look at Our Estimated Benefits

My estimated Social Security benefits as of 2010 are around $1,351 per month. Paul’s estimated Social Security benefits as of 2010 are $1,957 per month if he retires at 67 (full retirement age), or $1,369 per month if he retires at 62. Let’s say he retires at 67 and our grand total estimated monthly benefits are $3,308, or $39,696 per year. Sounds pretty good, right?

Social Security income is taxable. Our household would need to pay federal income tax on the first 50% of our SS income received, or on $19,848. This would amount to an approximate federal income tax bill of $2,300 per year, which reduces our income to $37,396.

Is $3,116 per for two people enough to live on each month? Absolutely, but that is based off of speculation as no one knows their future situation, or the future state of the economy. Any retirement planning has to take the unknown into account. We live in a cheaper area of the country in Texas, and we have no state income tax here. I would assume that our mortgage is paid off by the time we retire (you know what they say about assumptions…) and I would hope that we would be driving paid-off cars as well. Still, we would need to cover property insurance and property taxes each year, medical expenses which have a tendency to increase with age, our association fee, home maintenance and upkeep (not sure we will still want to or be able to mow at age 70), and this is all before we have begun to do any of the exciting things we want to do in retirement. Also, let’s not forget that this number assumes that we will receive full Social Security benefits when we retire, which the SSA has all ready stated is not likely to happen.

I actually haven’t sat down to think about what I would like to do during retirement, but the idea of lifestyle design is very intriguing. All of my energy and focus has been on saving enough for retirement. I know that I want to travel and do volunteer work and I know that this will cost money. Either way, I am unwilling to trust my retirement dreams to an administration which says it will have approximately 76% of benefits to offer in 2037.

Do you fund a retirement plan? What age did you start? What do you want to do in your retirement?

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Amanda L. Grossman is a Certified Financial Education Instructor, Plutus Foundation Grant Recipient, and founder of Frugal Confessions. Over the last 10 years, her money work helping people with how to save money and how to manage money has been featured in Kiplinger, Washington Post, U.S. News & World Report, Business Insider, LifeHacker, Woman's World, Woman's Day, ABC 13 Houston, Keybank, and more. Read more here.
23 replies
  1. Anonymous
    Anonymous says:

    Because it is a 101 course(beginners) article, I will not enter into any comprehensive detail about certain subjects.
    Roth IRA investing is amongst the easiest solutions to save
    and earn money while getting a great tax break.
    , and take advantage of the down real estate market right now and purchase these properties
    dirt cheap. Trends demonstrate investment in these commodities being highly risky.
    A couple of days later she took the proceeds and bought 11,
    088 ounces of gold.

    Reply
  2. Christa
    Christa says:

    Welcome to The Thirties Club! It’s a ton of fun with a lot less worry. I think you’re doing great on the retirement savings. Happy B-day!

    Reply
  3. Grayson @ Debt Roundup
    Grayson @ Debt Roundup says:

    This one makes you think. I plan on using 2013 to figure out where I need to be as I will be turning 30 in 2013. I am already funding retirement accounts, but I need to figure out what number I want to hit and how to hit it.

    Reply
  4. Shannon-ReadyForZero
    Shannon-ReadyForZero says:

    Happy birthday! It seems like you really are on the right track! I’m sadly very, very behind on retirement savings and will be playing catch up because of that…

    Reply
      • Shannon-ReadyForZero
        Shannon-ReadyForZero says:

        Sort of – once I pay off my consumer debt in the next few months, I’ll allocate all the extra money that was going to pay that off into a retirement account and then continue to do so from now on.

        Merry Christmas!

        Reply
  5. Farrah Zeman
    Farrah Zeman says:

    Did you know that factors like your age, gender, and marital status will impact your buyout from GM in their lump sum pension buyout plan? Understanding the factors involved and the impact they have on your options are crucial to making the right choice for your family. The best way to ensure you make an educated choice is to consult with a qualified financial planner. The offices of LJPR, LLC out of Troy Michigan are experienced in helping retirees navigate pension buyout options. They have put together an online video to help GM retirees understand this decision process, which you can watch by clicking http://youtu.be/32ZRne7AoTQ. There are less than two weeks remaining before the decision deadline of July 20, 2012. Schedule your appointment with a financial planner today.

    Reply
  6. World of Finance
    World of Finance says:

    I agree, you shouldn’t depend on social security for retirement. I have LONG graduated, but can still remember being told this same story when I was in 7th grade. I know they have been saying this for years, but it sounds like it could be a matter of time before this fund runs out; not to mention, I also have many years to go before retirement.

    Reply
  7. 101 Centavos
    101 Centavos says:

    The company I’m currently working for has a defined benefits pension (rare for a privately owned company, I know), but I’m not counting on it. Simple reason is, that the founder is getting up there in age, and the second generation could well decide to renege on that aspect or sell out. I give that about even chances.
    For Social Security, I give that no chances. There simply isn’t enough money to meet the trillions in Medicare, Medicaid and SS promises.

    Reply
  8. cashflowmantra
    cashflowmantra says:

    Social security is worthless to me. I am depending solely on myself for retirement. I have investments in stocks and real estate that will be paid off by then. Then I will live off the income. I will only retire when I have no debt at all.

    Reply
  9. Squirrelers
    Squirrelers says:

    No way anyone 20 or more years away from retirement should be counting on Social Secruity. Sure, we’ve paid into it. That doesn’t mean we should count on it at all, despite deserving the benefits promised to us. The right thing to see happen isn’t always what actally happens. Best to plan independently and be pleasantly suprised with any other help.

    Save, save, save…then save some more! Don’t let anybody ever tell you you’re wrong for doing that!

    Reply
  10. Jackie
    Jackie says:

    I certainly am not depending on Social Security for retirement. If something’s there when I hit the official retirement age, that’ll be a bonus. I fund a 401k plan, a Roth IRA, and additional investments. Technically I started when I was 19, but since all that money went bye-bye due to stupid mistakes and market crashes, in effect I started about 6 years ago.

    Reply
  11. krantcents
    krantcents says:

    I am six years away from retiring again. I will receive Social Security, pension and income from a lifetime of savings (IRA, Roth IRA, brokerage acct. & 403B). The best part of my teacher pension may be my lifetime medical. I started saving at 7 years old. I saved for everything I ever wanted. So this may be my strongest financial skill. My retirement will be filled with fun, interesting an stimulating activities such as classes, travel, volunteering, reading, blogging and a lot of things I have not thought of yet.

    Reply
  12. Crystal @ Industrial Special Risk Insurance
    Crystal @ Industrial Special Risk Insurance says:

    We could live on it pre-tax, but not when taxes are taken into account. We are saving as if we only have ourselves to rely on so if we get social security too, it’ll be awesome and extra!

    Reply
  13. Brave New Life
    Brave New Life says:

    There’s no way I’d depend on social security for retirement. I wouldn’t even trust it if I was 60, let alone 33.

    The government won’t fail to pay senior citizens, they’ll just print money to pay, effectively taxing savers like us via inflation. Over the next few decades, however, I think they’ll start weaning down SS to the point that it’s worthless.

    Reply
  14. LifeAndMyFinances
    LifeAndMyFinances says:

    My dad was banking on social security when he retired just a few months ago. Already, the president is talking about taking away a portion of this benefit, and my dad is a little nervous. Can they really take away the income that he’s worked so hard for? I hope not, but if the U.S. is in a panic, I can see it happening….

    Reply
    • Amanda L Grossman
      Amanda L Grossman says:

      Very unsettling situation. My grandparents have been retired a few years now and they banked on social security alone–they don’t have much money at all to live on. They are always reminding me to save, save, save!

      Reply

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