If 40% of your income just *poof* disappeared overnight, what would you do?
We recently looked at the very real possibility that our current senior military members, as well as their peers, may not receive any of the benefits of Social Security in retirement, despite having diligently paid into the fund for their entire careers. In this post, we'll look at how much income you need to be prepared to replace, and why rental income may be your best option.
Step 1: Identify How Much Income Social Security Represents
The Social Security Administration explains that your Social Security check should replace approximately 40% of your pre-retirement income. They estimate that you'll need approximately 70% of your pre-retirement income during your retirement, but that obviously depends on your plans. If you'll still be paying for a mortgage, a grandchild's education, or pricey rounds of golf to while away your newfound free time, then you may need more than just 70 percent.
Step 2: Identify How Much of Your Income Social Security Should Replace
Let's first identify how much income you'll need to replace. In July 2015, the Department of Research, Statistics, and Analysis at the Social Security Administration showed in their monthly snapshot that the average Social Security check amounted to $1,223.45. For retired workers, that amount was slightly higher at $1,335.97. The maximum monthly benefit that someone who retired from full-time employment at age 65 can earn is $2,663; whereas, someone who waited until age 70 to retire can earn a maximum monthly benefit of $3,501.
Since our unstable economy makes calculating interest and cost of living adjustments challenging at best, we'll use the numbers mentioned in step one as a baseline. Keep in mind that the numbers will likely inflate substantially by the time of your retirement. However, having a basic understanding of what proportion of your current expenses the purchasing power of the Social Security amounts referenced above represent should help you better identify how much of your income you'll need to replace.
Step 3: Analyze Your Options
One popular option for those preparing for retirement is downsizing, but that isn't always an option. In a recent article, Is it Time for Generation X to Downsize for Retirement, we looked at why people choose to downsize, but why the peculiar situation of Generation X--sandwiched between both parents and millennial children who may need living space--may mean that downsizing isn't the best choice for this generation. If you can't downsize, then a good alternative may be to find a way to pay down your mortgage more quickly instead. This way, you won't have the burden of a large mortgage in retirement.
If you've paid off your mortgage by the time you reach retirement age--an age that is still about two decades off at least--then your rental income could replace your retirement income lost from Social Security. You will still need your own housing, but if you pay off your current property through a combination of rental income from tenants who live in your house while you are located at another duty station and a good game plan for a quicker mortgage payoff, then you'll put yourself in a much better situation for retirement.
Step 4: Learn How to Get Started
If replacing your Social Security income with rental income appeals to you, make sure to check out our resources on how to get started as a military landlord.
