Can You Retire on Just Social Security?

Source: FBI

Social Security provides a decent foundation for most Americans' retirement plans, but like any foundation, it doesn't provide much in the way of overhead coverage. According to the Social Security Administration, the typical retiree receives about 40% of his or her average pre-retirement income from Social Security. If you're a high earner, the program replaces even less.

The average retiree received $1,331 per month from Social Security in February 2015. Unless you're still working or you take advantage of a once-in-a-lifetime do-over option, once you start collecting, your benefits are essentially set in stone for the remainder of your life. They increase only in-line with the official inflation rate -- an inflation rate that may not really keep up with seniors' costs.

Is that enough? If you're expecting Social Security to be your only source of retirement income, you need to ask yourself a simple question: Is it enough? Leave aside for a minute the still-open questions about Social Security's long-run solvency and just presume Social Security will continue as-is. If you're a typical retiree, can you cover your total costs of living on that $1,331?

Don't forget Medicare, too. If you accept Medicare Part B to get coverage for doctor costs, you'll be paying $104.90 each month out of that Social Security check. If you're worried about covering medical costs that Medicare won't cover, you'd also want to buy a Medicare supplement or Medicare Advantage plan, too. Premiums vary by coverage and location, but according to the Kaiser Family Foundation, the typical premiums for a Medicare Advantage plan in 2015 run about $41 per month.

Subtract Medicare premiums from that Social Security check, and what's left is closer to $1,185 per month. From that $1,185 per month you need to cover food, shelter, utilities, transportation, clothing, and the out-of-pocket healthcare costs that Medicare won't. And that's just the basics you need to cover merelyto stay alive. If you're in reasonably good health and live in a low cost part of the country, you might be able to make that work. Otherwise, you'll need more than just Social Security.

What can you do about it? If Social Security alone won't cover your costs -- or if you simply want a better lifestyle than what you'll be able to swing on just Social Security, you'll need another source of retirement income. If you have a pension, that will help, but most of us are left with only our own savings and investments to cover the costs that Social Security won't.

This raises the key question of how much you need to have saved up to cover those costs. A good rule of thumb is based on a retirement guideline known as the "4% rule." Under that guideline, if you start with and maintain a well-diversified retirement portfolio, you can:

Withdraw 4% of your starting balance in the first year,
Increase your withdrawal by inflation every year after that, and
Have a very strong chance of not outliving your money in retirement.

If a $3,000 per month income will cover your retirement lifestyle and your net Social Security check will be that $1,185 per month, then you'll need to cover $1,815 per month from your investments. That $1,815 per month works out to $21,780 per year, which by the 4% rule means you'll need a $544,500 portfolio to cover those costs.

If you're starting from $0, that may seem like a substantial amount to save. Fortunately, you don't need to save it all at once, and you don't have to rely on just the amount you save, either. If you invest the money, it has the potential to grow, and that growth can become a substantial part of your nest egg. The table below shows how much you need to save each month to arrive at that $544,500 nest egg at retirement, depending on what rate of return you earn and how many years you have until you need it:

Source: Author's calculations

Over the long run, the stock market has delivered returns near that 10% level, but it operates with a lot of day-to-day and even year-to-year volatility, and it comes with absolutely no guarantees. If you don't have the time or temperament to work through that volatility, splitting your investments between stocks and bonds can help tamp down on your overall daily portfolio volatility. That lowered volatility comes at a price, however -- lowered potential returns, especially with today's low interest rates.

Get started nowThe one thing that's abundantly clear from that table, though, is that the less time you have before you retire, the more you'll have to sock away every month to save what you need. The sooner you get started, the easier and cheaper it will be to reach your goal. So get started now and wind up with a better retirement than you'd have on just Social Security alone.

The article Can You Retire on Just Social Security? originally appeared on Fool.com.

Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.