Return of the Dinosaurs?
The Journal of Financial Planning runs a “Stat Bank” in each issue. One of the numbers stood out this month. 51% of surveyed retirement plan participants say that it is more likely that scientists will clone dinosaurs in their lifetime than it is that Congress will save Social Security. Wow. Personally, I am not that interested in seeing a T-Rex walk down my street.
The direction you think Social Security is headed plays an important role in the choices you make over time as you seek financial security and independence. My planning process always includes a discussion about Social Security benefits and Medicare. We ask several questions: Will Social Security play any role in your expected future? Do you know what percent of your retirement income will come from Social Security? Do you expect Medicare to be your primary access point for healthcare and do you know what it does and does not pay for? When was the last time you reviewed your Social Security statement and can I see it? (I have had a number of people with issues and have not received statements in years).
We look to incorporate expected cash flows when running financial plans. These cash flows include expected income from investment accounts, wages from employment, income from real estate ownership, proceeds from the sale of a business or other assets and payments from pensions. These cash flows can include expected Social Security income if you choose to include it.
Social Security always raises eyebrows and gets a laugh when we start to talk about it. As in, “Oh yeah, like I will ever get my money,” or, “Hasn’t the government already gone broke?” Younger people assume that Social Security income will not be coming to them and usually ask to exclude any calculation in the plan for future income. People in the middle, the baby boomer pre-retirees, are worried that it won’t be there for them. As a group, they have not done as much planning. They are in their peak income years, catching up on savings and expecting to have Social Security provide some help down the road. Retirees are worried about changes and cuts to Social Security as they have become used to having the income available (whether or not they need it). Following is a quick look at how Social Security income benefits work in a plan.
According to Social Security’s website, the maximum monthly income for a person retiring in 2010 at age 66 was $2,346. That equals $28,152 of income per year to supplement all other resources. This person must have worked from age 21 to age 66 and had the maximum Social Security wages each year. This information can be found here – http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/5/~/the-maximum-social-security-retirement-benefit .
Now, assume this same person saved each of his or her working years. I am going to assume a $5,500 savings rate for the first 25 years and $10,000 for the last 20. At an 8% rate of return, this money will grow to $2,518,246.51. Not a bad nest egg for saving into a retirement plan over time. Her investment was $332,000
In the past, I have discussed the options people have when it comes to spending money from a portfolio. Generally, it has been accepted that individuals can spend somewhere between 4% and 5% of a balanced portfolio to have their money last through an average length of retirement. This 4% can be indexed to inflation to have purchasing power remain steady over time.
Now, assume the person above. She has saved just over $2,500,000. That translates to about $100,000 per year to use from the portfolio starting with the 4% spending rule.
Social Security will pay her a bit more than $28,000 per year and will index that amount to inflation.
A significant part of her expected income comes from Social Security. Most likely, she has become accustomed to living on her salary, which would have been about $100,000 before taxes during her last few years of work. That would be about $75,000 per year of take-home. In those terms, Social Security alone is worth more than one-third of her needs. She has more than enough assets to make up the difference giving her a high degree of confidence in being able to live comfortably, in the style she is used to, for the rest of her life.
Even without Social Security, this individual should be able to maintain her standard of living through retirement. For her, Social Security provides the extras and protection. She now has money to use to achieve other goals—like additional travel, charitable giving or leaving a bigger estate. She can increase her lifestyle in some capacity without too much worry.
To achieve a similar result without Social Security, this person could have taken several different paths. She would have had to save close to 30% more over her working career. She could have taken more risk to seek a better return. She could have planned to reduce her lifestyle at retirement.
You will have to make similar decisions as you review your expectations for Social Security income benefits. We can work with you to incorporate your thoughts about Social Security and whether you expect to receive the full benefit, none or somewhere in-between.
Social Security started as a New Deal program in 1935 as a way to lift people from dire poverty, including the aging poor. It has now grown to be the largest government program in the world and is the largest part of the U.S. government budget.
Millions of people live on little more than their Social Security check each month, decreasing the likelihood that current benefits will be cut. Projections assume that there will enough money to pay for benefits through 2035 (or so depending on which estimates you choose) and will have to be cut after that time. It is hard for me to believe that people already receiving Social Security will see significant changes to their income from this program. Past changes have focused on people under age 50 who have enough time to adjust their planning.
If you are still in the accumulation part of your life, we can run your plans with or without Social Security. This will help you understand the savings and investment options you have.
The past two decades have seen little change in the approach to addressing future shortfalls and there is little talk of Social Security fixes right now.
The more I think about Social Security and the political climate, the more I think I might need to be ready for those dinosaurs.
Does anyone know where I can buy a four ton bag of T-Rex food?