The average retired worker earns a monthly Social Security check of $1,360, according to the U.S. Social Security Administration. And for most retirees, Social Security benefits are just one source of income, with many supplementing their checks with money that they’ve saved in 401(k) plans, IRAs, and other savings vehicles.
This doesn’t mean, though, that these Social Security dollars aren’t important. The administration says that Social Security benefits represent about 34 percent of the income of the elderly. That’s why it’s so important for retirees to create a budget for their Social Security benefits and determine the best way to spend such a significant portion of their monthly earnings.
There’s always a need for a budget
The first step in determining how to best spend Social Security benefits is to calculate your monthly income from all sources. Then, determine how much of this income comes from Social Security benefits alone. If Social Security accounts for 70 percent of your monthly income, you’ll have to be especially careful how you spend it. If it accounts for just 20 percent, you’ll have a bit more leeway.
Once you determine how important your benefits are to your monthly income stream, it’s time to calculate how much of your Social Security check you should devote to each of your main expenses.
Ideally, you’ll enter retirement without a mortgage payment. But that doesn’t always happen. You might choose to rent during your retirement years. Or, maybe you’ll spend your retirement years in assisted living.
Housing often remains a significant expense for retirees, with the Bureau of Labor Statistics reporting in March 2016 that seniors age 55 and older spend an average $16,219 a year on housing. Seniors from the ages of 65 to 74 spend an average $15,838.
If you receive the average Social Security check of $1,360 a month, you’ll receive $16,320 a year. This means that the average amount that retirees spend on housing would consume most of your Social Security income each year.
It might make sense to devote a set percentage of every Social Security check to help cover your housing expenses. How much that percentage is will depend on how much you are spending on housing. If you live in a home with a mortgage that’s been paid off, you obviously won’t need to spend as much of your checks on housing as you would if you were still paying a mortgage. If housing is a significant expense, though, you might consider devoting 60 percent or more of your Social Security check to covering it.
The Bureau of Labor Statistics reported that seniors from the ages of 65 to 74 spend an average $6,303 a year on food. This makes sense: You have to eat, whether you’re working or not. Make sure, then, to reserve part of your Social Security check for groceries and meals out.
You do have control over this expense, of course. You can eat out less often and cook at home more, which would reduce your food expenses. But setting aside 20 percent or so of your monthly Social Security check for food should suffice.
Depending on your health, medical costs could be a significant expense as you age. The numbers from the Bureau of Labor Statistics bear this out. According to the Bureau, adults from the ages of 65 to 74 spend an average $5,956 a year for medical care. The Bureau says that adults 74 and older spend an average $5,708 a year on health care.
Health expenses are one cost you have little control over. Sure, you can exercise and eat well. But you might still suffer health setbacks. It’s important to reserve at least some of your Social Security check to cover these sometimes unexpected costs.
Consider saving an additional 20 percent of your Social Security benefits for medical spending.
If you’ve been keeping track, those three expenses might eat up your entire Social Security check. Again, this depends on how much Social Security income you receive each month and how much you actually spend on housing, health care, and food.
If you find that these three big expenses do swallow most or all of your expenses, you’ll have to dip into your retirement savings and other income vehicles to cover costs such as travel, transportation, entertainment, and any other monthly bills.
Budgeting your Social Security check highlights just how important it is to have multiple income sources at your disposal after retirement. As you can see, Social Security doesn’t go that far when it comes to covering the basic living expenses of many seniors.
You do have options, of course. You can scale back your retirement plans, perhaps choosing to travel less and eat in more often. You can also take on a part-time job. That extra income could come in handy to cover the smaller, unexpected expenses that tend to come up.