Social Security is the first place to look when figuring how much money you need to retire.

Why? Your retirement savings needs are largely determined by how much you spend less the amount of income provided by Social Security and pensions.

For example, if you plan to spend $30,000 per year in retirement with your Social Security and pension providing $30,000 per year then you don’t need a lot of savings. However, if you plan on spending $130,000 per year in retirement with the same Social Security and pension benefits then you will need a whole lot of savings.

The difference between the two numbers is what matter most.

Social Security Benefits In A Nutshell

Once upon a time, a retiring American could expect to receive roughly half of their income from Social Security. However, if you are retiring behind the Baby Boom generation that figure is likely to drop to 25% or less. This has a dramatic impact in your calculations for how much to save for retirement.

Social Security is an unfunded system with no assets supporting it. It is merely a transfer of taxes from working people to those who are not working. It is pay-as-you-go. According to the Social Security Administration (SSA) website, there were approximately 16 workers paying to support one benefit recipient in 1950. Now the ratio is about three wage earners per recipient; in 40 years it is expected to be two to one—a ratio that will not sufficiently fund the payment of scheduled benefits without a tax increase.

Currently, surplus Social Security tax revenue is invested in Treasury bonds which can be cashed in later as they are needed. Without a program overhaul various studies indicate by 2041 there will no longer be surplus income, the bonds will be depleted, and the SSA will only be able to pay about 78% of scheduled benefits. These numbers indicate a 35 year old worker in 2007 can expect to see a 22% decrease in scheduled benefits starting in 2041 with additional annual reductions thereafter.

That’s not a pretty picture.

Can You Rely On Social Security For Your Retirement?

If you are already retired then you beat the demographic tsunami caused by the baby boomers and will likely realize a better deal from Social Security than those that follow you. But if you are planning to retire in the future, you should think carefully before counting on Social Security to pay your bills.

Social Security is not likely to vanish because that would be politically difficult. Instead, you should expect the benefits to fade away through a gradual process of means testing, age requirement increases, and inflation indexing that lags true inflation.

The government has already begun this process by changing when you can start collecting Social Security as a “full retiree.” If you were born before 1938 then you reach full retirement age at 65. Since life expectancy is now greater, those born after 1960 have to wait until age 67 to reach full retirement (the age changes gradually for those born between 1938 and 1960).

Alternatively, you can start drawing benefits when you turn 62, but your monthly check will be smaller than if you wait until the full retirement age. If you live significantly longer than the SSA tables expect you to, you will come out ahead by waiting those extra few years before drawing a check.

Going forward you should expect more changes like this because as the worker-to-retiree ratio narrows, the government has few options to balance the books. They can increase funding (i.e., taxes), raise qualifying standards, reduce benefits, destroy the value of benefits through inflation, or some combination of these choices.

Regardless of the solution chosen by government, the outcome for future retirees is clear: Social Security will likely satisfy less of your retirement needs. That means you will need to fund more of your retirement yourself by building your retirement savings. Your post-career income should come from multiple sources, including personal savings and an employer sponsored pension or 401(k). Don’t rely solely on Social Security.

How To Plan Your Retirement Savings Needs

To determine your expected Social Security benefits consult your wage and earnings statement sent annually by the SSA. You can also visit their website (www.ssa.gov) or contact them by phone (800-772-1213). But remember that any benefits scheduled for 2041 or later may not be there when the time comes.

If Social Security won’t be there for you then something else has to be. Below is a list of some of the ways you can balance the risk inherent in Social Security:

• Work longer: Even just a few more years as an earner instead of a spender can increase the monthly check you receive from Social Security. It also gives you more time to save (a double benefit since you would otherwise be spending from your savings) and to compound interest.
• Save more: You’ll be paying for a larger share of your retirement than you anticipated. This means you must increase your savings. And the more you put away, the more interest income you can earn.
• Consume less: You need less money for retirement if you plan to spend less. By starting now, you can develop sustainable spending habits to carry over into retirement. It may also help you save more money.
• Live healthier: Maintain your health through proper diet, exercise, and rest to help you live longer and more enjoyably. A longer life means more years of retirement even if you work longer than planned, and a healthier life can lower your health care and prescription drug expenses.
• Insure: Sufficient health insurance coverage ensures that medical bills will cause minimum damage to your retirement savings. Long-term care expenses are also a risk you may choose to manage through insurance.

In short, Social Security may not be the retirement plan you hoped for, but it’s not too late to take steps to secure your financial future. Be proactive by taking action now to offset the expected declines in real benefits over time. With proper planning you can supplement what Social Security will provide so that you can retire with financial security and peace of mind.

About The Author: Todd R. Tresidder is a retirement coach, financial blogger, and author of several financial ebooks including “How Much Money Do You Need To Retire” teaching you how to take the next step beyond retirement planning calculators. He lives with his wife and two children in Nevada where he enjoys the outdoor recreation lifestyle.