Retiring solely on Social Security benefits can present significant financial challenges for seniors. Without any additional savings, it is likely that individuals in this predicament may struggle financially to some degree. On average, Social Security is expected to replace about 40% of one’s pre-retirement salary. However, this estimate assumes that benefits will not be cut in the future, which is a possibility if the trust funds for Social Security run out of money.
To have a comfortable retirement, seniors are generally advised to aim to replace about 70% to 80% of their pre-retirement income. Unfortunately, relying solely on Social Security falls far short of achieving this goal. Living on Social Security alone may become a reality for those nearing retirement without substantial savings. While this is far from an ideal situation, there is one potential benefit to look forward to.
One surprising fact that many seniors discover is that Social Security benefits are taxable at the federal level. However, those with low incomes can often avoid paying these taxes. The determining factor for whether your Social Security income will be taxed or not is your provisional income, which is calculated by adding 50% of your annual Social Security benefit to your non-Social Security income. If you have no additional income besides Social Security, you will likely remain below the income threshold for having your benefits taxed.
For single individuals, taxes on Social Security benefits kick in once their provisional income reaches $25,000. The threshold is higher for married couples filing jointly, at $32,000. The average monthly Social Security benefit stands at $1,848, which is set to increase to $1,907 in 2024. Therefore, if your retirement income only consists of a benefit similar to the average, you can expect to avoid taxes on your Social Security payments.
While avoiding taxes should not be the sole reason for relying on Social Security in retirement. It does provide some relief for those in this situation. However, living on an income of approximately $22,884 per year, or even double that amount for married couples, can necessitate significant budget cuts. Consequently, retirees might benefit from exploring additional sources of income, such as part-time employment.
Making extra income through part-time work may or may not result in taxable Social Security benefits. However, there are circumstances where paying a modest amount of tax on these benefits is worth it to have more overall income. While minimizing taxes can offer some respite for seniors relying solely on Social Security, it is crucial to consider the financial challenges and potential budgetary constraints that may arise from retirement without substantial savings.