This is the No. 1 source of income for millions of older Americans — and that may pose a problem

Just one in four retirees say they have not experienced any kind of shock event in retirement, according to a study from the Society of Actuaries.


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Where is the 65 and older crowd getting their cash these days? Of the average $53,335 made in the past year by Americans in the retirement-age cohort, more than half (51%) came from Social Security, government pensions or private funds like IRAs, according to government data.* Most of the remainder of their income is made up of wages and salaries (34.4%), followed by interest, dividends, rental income, and other property income (6.2%); self-employment income (5.5%); and a handful of other nominal sources.  

When you dig deeper into the numbers, you realize that Social Security is the primary source of income for a large sect of the older population — and that may prove challenging for them. Indeed, among elderly Social Security beneficiaries, more than one third of men (37%) men and four in 10 women (42%) receive 50% or more of their income from Social Security, according to the Social Security Administration.

Why is an overreliance on Social Security challenging for older Americans?

Pros say this overreliance on Social Security can make dealing with large, irregular costs challenging like “when these seniors need a large lump sum for a one-time expense like a new car or home repair,” Jessica L. Fahrenholz, a certified financial planner with Tudor Financial in Dayton. (For context the price of a new car is 8.4% higher than it was a year ago, government data show. And when it comes to home repair, a recent Angi’s State of Home Spending Report found households spent $3,018 on maintenance costs and $2,321 on emergency repairs last year alone.)

These kinds of large, irregular costs are more common than you might think: As I reported recently, only about one in four retirees has not experienced any kind of shock event in retirement, according to a study from the Society of Actuaries. And these shock events — a huge dental bill, for example — often come with a shock price tag, too.  In fact, healthcare expenses should be a major concern for older Americans — as couples who are 65 or older can expect to spend around $315,000 after-tax dollars on health and medical expenses throughout retirement, a study from Fidelity found.

What’s more, some pros note that Social Security payments are generally pretty low ($3,345 for those who take distributions at full-retirement age of 67 and $4,194 for those who retire at 70, according to the Social Security Administration) and despite being adjusted for inflation, may not actually keep pace with inflation (which is still sky-high at 7.7%). 

“I empathize with seniors who solely rely on Social Security in retirement, as monthly expenses increase with inflation,” said Fahrenholz, adding that “higher costs for our senior clients have certainly had an impact on fixed incomes.” 

And with high inflation expected to boost the Social Security cost-of-living adjustment, or COLA, in 2023 (by an average of $144), tax filers may have to pay income tax on a significant chunk of those benefits. “It’s really vital income being taxed away,” Senior Citizens League’s Social Security and Medicare policy analyst Mary Johnson said in a recent interview with MarketWatch retirement reporter Jessica Hall. “It can be burdensome with serious repercussions on how people access what they need — their housing and food resources, which affects their health.” 

What’s more, as my colleague Alessando Malito reported, Social Security may have some future funding issues, which could mean potential cuts to benefits. 

Tips to help older Americans protect their income

Wherever your income is coming from, pros say there are a number of ways you can better ensure you’ll have enough money to fund your life. One big thing is to cut back on housing costs if you can, as they tend to be the lion’s share of older America’s spending.  That could mean moving somewhere far less expensive or paying off that mortgage before retirement. “In this environment, retirees without home mortgage payments, who can take full Social Security benefits, qualify for government health coverage, and only pay 12% income tax are in the best spot,” said Amy Hubble, principal investment advisor at Radix Financial.

It’s also key to address tax obligations now, before it’s too late. Individuals over the age of 65 paid an average of $2,185 in personal taxes, over the past year, or 10.71% — stimulus payments were not taxed. Considering this factor, Kris Etter, a certified financial planner at Beacon Financial Planners in Houston, Texas, says the best advice here is simple: plan ahead. 

Before turning 65, “two years prior,” to be exact, adults in this age group may look into converting their traditional IRAs to Roth IRAs, Etter explains. While he stresses that the process must be done with the help of a financial professional, the reason for the move is “that you can pull from your Roth IRA and not increase your taxable income until you must take Required Minimum Distributions (RMDs) from the amount not converted.” The RMD age is currently set at 72, or 70 ½ if you reached that age before Jan. 1, 2020, according to the IRS. “During this time, they can also defer their Social Security benefit to receive a larger amount at age 70,” he added.

Finally, do a thorough assessment of your spending. “In my view, keeping finance personal and doing a review of personal spending is a helpful exercise to identify opportunities to cut down on spending and give room in the budget,” said Fahrenholz. And while it’s not always possible, if there are opportunities for part-time or gig work, consider them. 

* BLS data for this story includes both individuals and consumer units (CUs), or people who are related by blood, marriage, or adoption, and those living with others but are financially independent. CUs also include individuals living together and who make joint financial decisions.

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