Apply Social Security and Pensions
to Retirement Income Need
Historically, most people have relied on three primary sources for their retirement income:
These are the cornerstones of a person’s retirement income. It’s important to understand that these combined income sources determine how comfortable one’s retirement years are.
- Social Security
- monthly pension benefits
- personal savings, investments, and other resources (including qualified retirement plans, which the individual owns or to which he or she contributes)
These are the cornerstones of a person’s retirement income. It’s important to understand that these combined income sources determine how comfortable one’s retirement years are.
To a great extent, it is only the latter—personal savings and investments—that an individual can control. The amount of Social Security and pension benefits, if available, are established by a formula—the benefits are set. To the extent that an individual trusts that his or her Social Security and pension benefits will provide their promised benefits (and most consumers, though wary, still do), these benefits are applied to the estimated annual retirement income need. Any income need that is not covered by Social Security and/or a pension must be addressed by personal savings and investments or through income derived from other sources (such as continuing wages).
Let’s return to Ted. We’ve determined his initial annual income need upon retirement will be about $86,000. Based on the annual statements he receives from Social Security, the projected yearly Social Security benefits he and his wife will receive at retirement are $22,000, and his pension benefits will be $12,000. Right now, he does not anticipate continuing to work during retirement. To achieve his income goal, the remainder of his income need must derive from personal savings and investments or from other sources.
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A simplified illustration shows this calculation:
Annual retirement income need:.............................................. less Social Security benefits...................................................... less pension benefits................................................................. less income from wages............................................................ Remaining annual income need:.............................................. |
$86,000 -$22,000 -$12,000 - $0 -$52,000 |
The remaining annual income need represents the gap in retirement income that must be generated by personal savings and investments. For many individuals, finding that more than half of their desired retirement income will have to come from other than government or employer-provided resources is common. The next step in determining the retirement income need is to estimate the amount of savings needed to produce this additional income.
