Jean Chatzky sounds alarm on Social Security, 401(k)s

Millions of Americans are either retired or are preparing for retirement, and many are actively planning to take care of their financial needs while aspiring to live their retirement dreams.

Jean Chatzky, personal finance bestselling author and former financial editor of NBC's "Today" show, sees an individual's journey to discover this delicate balance as finding a concrete understanding of the things one wants as they differ from what one truly needs.

Related: AARP has blunt warning for Americans on Social Security

Financial programs and tools such as Social Security, Medicare, 401(k) plans and Individual Retirement Accounts (IRAs) are important pieces of the retirement puzzle, but so is a healthy ability to grasp — intellectually and emotionally — the distinction between necessities and desires.

"Retirement, after all, is supposed to be the land of wants," Chatzky wrote on HerMoney. "It’s supposed to be the time in your life for which you’ve worked, saved, invested and planned so that you don’t have to be worried about needs and can do, well, whatever you want. Right? Well, yes and no."

Jean Chatzky says 70 is the best age to collect Social Security

A significant, but preferably not primary, source of retirement income for most Americans to meet their basic financial needs is their monthly Social Security paychecks.

Chatzky believes age 70 is the best time to collect Social Security.

For example, if one were to claim a Social Security monthly benefit of $1,500 at age 62 when they are first eligible, their paycheck would be that amount permanently. If their full retirement age is 67 (as most are), their benefit at that point would be about $2,100 per month.

By delaying until age 70 they would earn delayed retirement credits of 8% per year for three years, raising their benefit to roughly $2,650 per month. Importantly, that 8% annual increase applies only for each year one waits beyond their full retirement age, not from age 62.

For couples, Chatzky recommends weighing who should postpone claiming based on life expectancy, which can strengthen household finances over time.

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An even greater concern is the approaching shortfall in the Social Security trust funds. If lawmakers fail to intervene, the reserves may run dry by 2033, which could force benefit cuts of 20% or more for future retirees — a reduction that risks upending countless retirement strategies, according to the Social Security Administration (SSA).

These worries are important as one weighs how much they have to spend on necessities.

"There’s your basic lifestyle, which includes the expenses you need to cover: food, utilities, property taxes, healthcare premiums and the like," Chatzky wrote. "Because these are needs that you’re likely to have throughout retirement, you don’t want to take considerable risk (some people would say any risk) with the money you’re using to pay these expenses."

Jean Chatzky explains why 401(k)s and IRAs work

Chatzky highlights the critical role of automating savings as a cornerstone for growing retirement wealth.

While one is planning for retirement during their working years, she recommends consistently putting money aside, particularly through tools such as 401(k) plans that withdraw contributions straight from paychecks before they ever hit a person’s account.

By removing the chance to spend funds that never appear in hand, this method makes it far simpler to stay disciplined and focused on long-term financial objectives.

The same principle applies for IRAs.

Chatzky explained that 44% of U.S. households are actively contributing to IRAs— including Roth IRAs for which one pays taxes upfront so they do not have to pay them when they withdraw money in retirement — as a crucial tool to help people bridge the retirement savings gap.

By making automatic contributions to an IRA consistently while one is working, the investments add up without one seeing the money in their checking account as a temptation to spend it.

Chatzky explains 4 types of retirees

The HerMoney founder cites Brookings economist Ben Harris, who describes four distinct economic groups into which retirees fall.

• Individuals who have earned a low income throughout their lives and lack meaningful retirement savings.
• Lower income and lower-middle income individuals who may have achieved some financial stability, such as paying off a home, but have not built significant retirement savings.
• Middle income and upper income individuals who have successfully accumulated a substantial amount of retirement savings.
• Middle and upper income individuals who, despite higher earnings, have not saved for retirement.

"The first and second groups will likely be able to maintain their pre-retirement standards of living because they haven’t been overspending throughout their lives," Chatzky wrote. "The third group has saved enough to cover their needs and wants."

"It’s the fourth group that Harris worries about," Chatzky emphasized. "They’ve been overspending the entire time."

"No matter which group you fall into, you’ll want to formulate a plan that allows you to have as much of both your needs and wants as possible."

Related: AARP sends strong message on Social Security, Medicare