How Much Americans Should Americans Save to Make Up for Social Security Cuts?

By Lindsay Frankel
Inside Subprime: Nov. 3, 2020

Most Americans aren’t financially prepared for unexpected job lost or emergency expenses, let alone making progress towards amassing enough wealth to retire comfortably. The Federal Reserve found that one quarter of Americans don’t have anything stashed away in a retirement account, and more than 6 in 10 Americans admitted they weren’t on track with regards to retirement savings. As a result, many retirees will rely on Social Security benefits to afford basic living expenses, as current elderly Americans already do. About half of seniors rely on Social Security for at least 50 percent of their income, and for one quarter of Americans, these benefits make up 90 percent of their income or more. If it weren’t for Social Security benefits, 15 million more elderly Americans would be living in poverty. 

That’s especially concerning for future retirees, since intermediate estimates from the Social Security Board of Trustees indicate that the trust fund will run dry by 2037, at which point payroll tax revenue will only be able to cover 76 percent of the benefits that seniors are entitled to. Here’s what you need to know and how much you should save for retirement.

What is Social Security?

Social Security benefits are intended to supplement Americans’ savings and provide income through retirement or in the case of disability. When you work for an employer, you pay 6.2 percent of your income into Social Security, and your employer matches that amount. If you’re self-employed, the tax rate is 12.4 percent. You’re only required to pay this percentage on income up to $137,700. 

The Social Security Administration uses that money to pay benefits to retirees, people with disabilities, survivors of deceased workers, and dependents of Social Security beneficiaries. It’s a common misconception that these benefits are held in an account for taxpayers to access after retirement. The money goes towards Americans who qualify for the benefits now. 

You become eligible for Social Security benefits by paying into the system for a number of years. In 2020, you earn a credit for every $1,410 in earnings, up to four credits per year. Most Americans become eligible for benefits after they’ve earned 40 credits (or worked for 10 years). Your benefit amount is based on your earnings. Though the percentage of your income you’ll receive in benefits decreases as you earn more, ranging from 75 percent for low-income earners to about 27 percent for high-income earners, greater lifetime earnings translates to higher payouts during retirement. 

The Future of Social Security

Reserves are expected to be depleted by 2037. While the Social Security Administration will still collect money from taxpayers, this will only be sufficient to pay for 76 percent of scheduled benefits. In order for Americans to receive their expected benefits, Congress will likely need to make changes to the program’s sources of revenue. Most likely, the solution will involve some combination of raising payroll taxes and reducing benefit amounts. 

That means Americans may have to save more to prepare for retirement. The average social security payout in June of 2020 was about $1,514 per month. If benefits were cut 24 percent, that would mean the typical American would lose out on about $4,361 every year. Most financial advisors suggest saving 25X the annual income you would need to support your lifestyle in a retirement account. Therefore, the average American would need to save an additional $109,020 to make up for Social Security cuts and still retire comfortably. 

If you’re a high-income earner, you’ll need to save even more than that. Experts say you should aim to have 70 percent of your pre-retirement income for each year of retirement in order to maintain your lifestyle. If you sign into your social security account, you can estimate your benefit amount, calculate how much of it you’ll lose in a 24 percent reduction scenario, and multiple that number by 25 to see how much additional savings you’ll need to retire comfortably. 

How Americans Can Prepare for Retirement

Fidelity Investments recommends that Americans save at least 15 percent of their pre-tax income annually for retirement. This figure can include contributions from your employer, but if you’re self-employed, you’ll need to be especially conscientious about saving. You’ll also need to start saving at age 25 for that savings amount to be sufficient. If you’re 35 and don’t have retirement savings yet, you should aim to contribute 23 percent of your pre-tax income to a retirement account each year, including any employer matching. 

If you’re behind on saving, another option would be to delay your retirement. Many Americans find that they need to work at least part-time after the age of 65 to make ends meet. Conversely, if you want to retire early, you’ll need to save an even greater percentage of your income. 

To make it easier to reach your goals, utilize tax-advantaged savings vehicles and take advantage of employer matching. You can expect an average annual return between five and eight percent if you contribute to a 401(k) and between seven and ten percent for an IRA. That means if you put $10,000 in a retirement account today, you could have more than $75,000 to access 30 years from now, before taxes. If you would like to learn more about retirement planning, please consult with a professional financial planner.

It’s also a good idea to automate your savings in order to stay on track. If your employer offers automatic deductions from your paycheck, consider automatically contributing up to the maximum your employer will match. If you’re self-employed, you can set up automatic monthly bank account withdrawals into an IRA. 

You’ll need a sizable nest egg to retire comfortably, especially in cities with a high cost of living. $1 million would only last you about 10 years in cities like New York and San Francisco. The amount can seem intimidating, but if you stick to your budget and stay consistent with your contributions, you’ll be able to amass enough wealth to have your needs provided for in retirement.

For more information on the middle income consumer, subprime loans and payday loans, see our city and state financial guides including states and cities like California, Texas, Illinois and more.