I believe most people of my generation (35-45) understand that Social Security is a misnomer. Just as the life expectancy for individuals my age has extended from 74 to 78, as of today, Social Security benefits are being pushed back year by year. Right now, someone born in my generation is expecting to collect Social Security at the age of 67, but it is highly likely that will be pushed back eventually. Since I was in high school, I have been told not to rely on Social Security for retirement.
You are probably asking, “Why should this matter to me? By the time I retire, I will have put enough money into Social Security that I should be fine.” Saving 19% of social taxes should put us in a healthy place, shouldn’t it?
There, as Hamlet says, is the rub; Social Security was designed to be a trust fund to benefit an aging population during a time when employment was at an all-time low and the dust bowl was living up to its name. In 1935, people had lost not only their investments, but their family farms and businesses. President Roosevelt signed Social Security into action as a short-term way of helping Americans survive until the economy turned around.
Eighty years later, Americans have begun to count on the “government” - meaning current taxpayers - to support them in their old age. But there’s a problem. The government has been borrowing from our trust fund for years, and has not been replenishing what was taken. Add to that the aging “Baby Boomer” generation, who had fewer kids than their parents, and we find ourselves in a progressively top-heavy society.
Fast forward to today. In 2016, Social Security paid out $916 Billion. That’s over eighty percent of what the government collected in social income tax. Social Security payouts account for over 81% of social tax collected, but the average Social Security retirement check is $1,341…$151 a year under the poverty line.
The moral of the story is, if you rely on social security to provide for you after your retirement, even if the government doesn’t do a worse job than they have been doing, you are going to live in poverty after you retire.
The average taxpayer pays 7.65% of their gross income into Social Security. (Self-employed individuals pay over 15% of their income into Social Security, which amounts to highway robbery.) For a household making $50,000 annually, 7.65% is $3,825, or $318.75 a month.
If you drop $318.75 into investments that gain the “average” rate of 7% from the age of 20 to the age of 67, you have $1,417,028, according to Bankrate.com investment calculators. A 4% draw on $1.4 million - the standard calculation for living off an investment portfolio - you would get $56,681.12, or $4723.43 a month - 3.5 times as much as you would receive on Social Security.
If you made a slightly better return - let’s say your returns matched the S&P average of 10% - you would have over $4 million. That’s $160,000 a year if you’re living off a 4% draw.
In other words, if you could invest your money instead of paying for people to retire on it, you could retire comfortably without having to rely on other people to pay your retirement.
Now, do I think Social Security is evil? No. In its history, it has helped people keep from starving. However, that was always its only purpose. Social Security was created during a financial depression to provide a way for families, and especially the elderly, to eat. It was never intended as a way to live out long retirement years, and certainly not as a way to retire well.
While I harbor the dream that someday we as a country will move away from Social Security and learn to be savers and investors, I know that day is a long, long way off. It cannot be hoped for until long after I retire and, probably, die.
But I also know that it is possible to retire without the need for Social Security. Even if you are like me, and almost in your forties (or even older), you still have the potential to retire a millionaire. I’ll even help you with the math: $500 a month at the S&P average of 10% gives me slightly over a million dollars in 29 years. (That’s age 67 for me.)
But do I plan to retire on a million dollars? Not me. I’m planning to retire in style.