Millions of senior citizens breathed a sigh of relief when the Social Security Administration announced that due to inflation it would be increasing payments by 3.6% in 2012 -- the first cost-of-living adjustment since 2009.

So what exactly does this increase amount to? Not a whole lot.

The average expected benefit for a retiree in January 2012 is a meager $1,229, and that's including the recent increase. That works out to $14,748 a year, or a bit more than $7.37 an hour for a typical 2,000-hour-a-year job.

That's barely above the $7.25 hourly minimum wage.

(Of course, Social Security benefits aren't taxed unless you have substantial other income, which means it's not a perfect apples-to-apples comparison. But it's pretty close: By the time typical minimum wage earners get their refundable tax credits back, their tax picture looks about the same as a Social Security recipient's.)

Can You Live on Less Than $1,000 a Month?

For those anticipating a retirement financed by Social Security, $15,000 a year is far from enough to lead even an "average" lifestyle.

Wait, it gets worse. That $1,229 a month is what you get before any Medicare premiums are deducted.

Once you deduct the typical premium costs for that subsidized health insurance program for seniors, there is substantially less left over. The table below shows typical premiums for Medicare recipients, above and beyond what they paid in taxes while working to support the program:


Medicare Program
Typical Monthly Premium
Part A
$0.00
Part B
$99.90
Medigap
$164.67
Part D
$39.62
Total Typical Premium
$304.19
Sources: Medicare, HHS, Weiss Ratings, and q1medicare.com.

Subtract that $304 from the average $1,229 monthly Social Security check, and the average retired senior is left with about $925 per month to spend on -- well, everything that isn't health insurance. You know, food, clothing, shelter, transportation, and the other costs of living.

By this point, one thing should be abundantly clear: You're not likely to have much more than a bare-bones retirement if you're planning to live on Social Security alone. And that's even before the Social Security Trust Fund evaporates around 2036, slashing expected benefits by about a quarter.

Kicking the Legs Out from Under Your Finances

Back when traditional pensions were a common employee benefit, the retirement planning was visualized as a "three-legged stool." Social Security provided one of the legs, with your pension and personal savings making up the other two.

These days, Social Security's problems are well known and private pensions are available to far fewer employees than they once were -- which leaves your personal savings to pick up the slack.

That's not an impossible hurdle to clear if you've got a few decades before you retire. But if you plan to stop working in a time frame measured in years rather than decades, you've got a challenge ahead of you. You'll need quite the nest egg to cover the costs not covered by your Social Security check if you want your money to last at least as long as you do.

How Big a Nest Egg You Need

The most common guideline used to determine the amount of money someone needs in order to retire is based on a formula known as "the 4% rule."

That rule suggests that retirees can spend 4% of the value of their well-diversified portfolio in the first year of retirement, adjust the amount upward by inflation annually, and be reasonably assured that their money will last through a 30-year-long retirement.

Based on that rule, that means your portfolio needs to be 25 times the size of your annual spending not covered by your Social Security checks.

Say you're spending $48,109 a year -- the amount spent by the typical American household in 2010. To keep your current lifestyle in retirement, you'll need a portfolio of at least nearly $1 million, even with Social Security. The table below shows why:

Building Block
Amount
Annual Spending
$48,109.00
Medicare Premiums
$3,650.28
Net Annual Spending
$51,759.28
Social Security
$14,748.00
Annual Expenses Investments Need to Cover
$37,011.28
Require Portfolio Size
$925,282.00
Source: author calculations, based on values mentioned earlier.


It's true that if your house is paid off, your children are grown, and you no longer have to cover the expenses of working, your cost of living may drop somewhat. But then, factor in increased out-of-pocket medical costs, and possibly the desire to travel while you're still young enough to enjoy. Those two items alone could eat all the savings you accrue from the other budget reductions, so you'll still be spending the money -- just in other ways.

So don't count too much on reduced expenses -- or Social Security. You're going to need a jumbo nest egg to enjoy retirement.

For more on managing your money for (and during) your golden years, see:

Motley Fool contributor Chuck Saletta appreciates your comments.



Correction: An earlier version of this article said that Social Security benefits were tax free under all circumstances. Social Security benefits may be taxed in some circumstances, See: http://www.ssa.gov/planners/taxes.htm.


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616 Comments

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Maloogie

To generate more than 4%, you need high dividend stocks, some Class A Preferred (7%) some high yield (8%) and some combo's, that allow you to write covered call options against--Altria (MO) which pays 5.5% and you can write four 45 cent call options a year against, another 5.5% or 11%.

You still need $350,000, not $925,000--and by the way, there is no "rule" of 4%. Who made up that nonsense?

October 04 2012 at 2:01 AM Report abuse rate up rate down Reply
Mad Dog

There is not way to save 925 thousand dollars in today market. That is just crazy>

January 07 2012 at 5:32 PM Report abuse rate up rate down Reply
mrpir898

Really RacerCJ30? No high end earner gets back 100% of their contribution rate. I've barely maxed out for several years and my annual statement is less than 2/7 of my income for "projected" benefits. Additionally, I will be taxed on the amount I am projected to receive. SS was meant to assist citizens, not cover all expenses. Even the artificially low gov't. "inflation" adjustment is untennible. Giving $1200 per year increase is a death knell to a system already on it's last legs.

January 06 2012 at 10:09 PM Report abuse rate up rate down Reply
m_millan

aol.goglee/face book

January 06 2012 at 11:43 AM Report abuse rate up rate down Reply
nthereoff

They the goverment does what ever it wants went it comes to S S. This year a raise of 3.5.? What happen to the last 2 years of no raises. Who kidding who?

January 04 2012 at 2:35 PM Report abuse rate up rate down Reply
RacerCJ30

Part 1. of 8.
Sent To:
To: The President and House Ways and Means for AMENDING & IMPLEMENTATION URGENT

THIS NEEDS TO BE AMENDED FOR THE COST OF LIVING INCREASES FOR SOCIAL SECURITY
AND SOCIAL SECURITY MUCH NEEDED REFORM

On 10-18-11 the local News asked the views of their opinion if 3.5 percent was enough for the Social Security increase I wrote no that it should be 4.5411 percent.
Kevin S. Gerig - RacerCJ30@aol.com Leo, Indiana 46765

December 29 2011 at 3:20 AM Report abuse +1 rate up rate down Reply
RacerCJ30

Part 2. of 8.
On 10-19-11 The in local News released that the increase world be 3.6 percent and they also provided a link to the Social Security Press Release which also stated that Social Security was raising the cap subjected to earning from $106,800.00 to $110,100.00.
Well that just bugged me all day that is was now right and here is why.
A Social Security recipient receiving $800.00 a month = $9,600.00 a year get a increase of $345.60.
A Social Security recipient receiving $9,175.00 a month = $110,100.00 a year get a increase of $3,963.60.
As you can see the difference for yourself. When I first brought it to Washington attention about a month ago that they needed to reinstate Social Security cost of living increases along with my reform. I was only thinking about the needed people on Social Security that need my plan to survive. An the answer to whether I thought that was enough of a percentage of increase was wrong.
Kevin S. Gerig - RacerCJ30@aol.com Leo, Indiana 46765

December 29 2011 at 3:20 AM Report abuse rate up rate down Reply
RacerCJ30

Part 3. of 8.
This is a cost of living increase and should be equal to all receiving Social Security with no cap on earning, this should be a fixed amount of $100.00 a month = $1,200.00 a year increase for everyone receiving a Social Security and future annual increases of $1200.00 a for every year beyond. Not a percentage for cost of living increases for Social Security Recipients that is just wrong. Why should anyone person be any different from anyone else on a cost of living increase from Social Security?
This would even be a more balanced approach of out lay of the cost of living increases or less than the percentage method.
An the all Recipients of Social Security also need the last two year of cost of living increase paid out to them at $100.00 a month totaling $1,200.00 a year for each year 2010 & 2011. For 2012 to be fair all Social Recipients should receive the highest paid increase to the top level person to be fair for all because this is not a raise be a cost of living increase.
Kevin S. Gerig - RacerCJ30@aol.com Leo, Indiana 46765

December 29 2011 at 3:20 AM Report abuse rate up rate down Reply
RacerCJ30

Part 4. of 8.
Plus this Reform needs to be changed to a $2000.00 month minimum plus all cost of living increase for Social Security Recipients as described below. With anyone who receives less than $27,000.00 a year no cost for medicare and no co-pay or deductible for all Medical Health. Subtracting from a Social Security Award Amount to pay for Medicare which is also a Government Insurance plan never made any sense thinking of the poor people again when having insurance (even not the best is better is than nothing.) But what with what some get from Social they can't even afford Medicare. They sure can't afford to live on their own to pay rent or have a mortgage or pay utilities if they had home. An if they want to buy a home they will never get approved for the mortgage.
Kevin S. Gerig - RacerCJ30@aol.com Leo, Indiana 46765

December 29 2011 at 3:19 AM Report abuse rate up rate down Reply
RacerCJ30

Part 5. of 8.
This also does not fix Social Security. I have plans that fixes and improves a lot more.
The only way to fix Social Security is two parts to fix it so people who are on can live without struggling to live. Right now a people receiving Social Security can not afford to make end meet or to live on their own. The second part would be funding it.
The Federal Government needs to raise Social Security checks for all Recipients to the monthly minimum limit of $2000.00 a month plus cost of living increases for everyone receiving SS, SSD no matter what their age is referring to legal age of adult. All Social Security recipients should be allow to work without restrictions or risk of lost of benefits in anyway.
Kevin S. Gerig - RacerCJ30@aol.com Leo, Indiana 46765

December 29 2011 at 3:19 AM Report abuse rate up rate down Reply