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TMFBro (< 20)

$1 from Social Security = $25 in your 401(k)

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July 14, 2009 – Comments (10)

How important is Social Security to retirees? Journalist Scott Burns has some enlightening stats:

"According to a recent study by EBRI, the Employee Benefit Research Institute, Social Security provides an average of 38.6 percent of all income for people age 65 and older. That’s more than double the 18.6 percent that comes from pension and annuity income or the 15.6 percent that comes from assets.Even if your income puts you in the top 20 percent of all retirees, Social Security benefits are a big deal. The same EBRI study shows that top-quintile seniors still get 17.2 percent of their income from Social Security. Impressed? You should be. Every dollar of Social Security income eliminates the need for $20 to $25 of retirement savings."

First off, notice that "15.6% from assets" -- that's how much income a lifetime of saving is providing today's retirees (at least the savings that weren't annuitized). That tells me that most people need to save a lot more, especially given how much less our investments are worth nowadays. 

How much of your savings can you take out annually once you retire? Somewhere between 4% and 5%, which is where Burns' "Every dollar of Social Security income eliminates the need for $20 to $25 of retirement savings" comes from. Assuming a 4% withdrawal rate, to get a dollar of income, you'd need $25 in savings (0.04 X 25 = 1). You'd need $20 with a 5% withdrawal rate (which, by the way, is a historically riskier withdrawal rate). 

Put another way, if your household will receive $20,000 annually from Social Security, that's like having $500,000 in your portfolio.

"But Social Security is underfunded!" you say, and you're right. The nearly and already retired will be OK, but we younger retiree wannabes won't get what we're promised. (If I were king of the world, I'd raise the eligibility age, but that's a topic for another post.) But we will get something, and many will be grudgingly grateful for it -- like the women I know who is in her 70s, who for years complained about FICA taxes, but now admits that she's likely better off now than if she had been investing that money. Not a sentiment I feel applies to me, but  from what I've seen, it certainly applies to plenty of other investors.

 

10 Comments – Post Your Own

#1) On July 14, 2009 at 10:26 PM, TMFBro (< 20) wrote:

Oops, the link to Burns' article fell out. Here 'tis: http://assetbuilder.com/blogs/scott_burns/archive/2009/07/03/life-of-riley-index-retiree-version.aspx. Sorry about that.

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#2) On July 14, 2009 at 10:30 PM, devoish (98.38) wrote:

The nearly and already retired will be OK, but we younger retiree wannabes won't get what we're promised.

I have read from what I consider reliable sources that you will get more than todays retirees. I think it was inflation adjusted dollars.

If ii see is again I will post and link it.

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#3) On July 15, 2009 at 2:49 AM, RonChapmanJr (94.88) wrote:

I'm 28.  I don't expect to get anything from Social Security.

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#4) On July 15, 2009 at 8:19 AM, TMFBro (< 20) wrote:

I don't expect to get anything from Social Security.

I understand your sentiment, and from a planning perspective, it might be prudent to assume you won't get anything. But remember that Social Security is a pass-through program -- today's FICA taxes paid by today's workers go to today's retirees. So as long as there are people working and paying taxes, you will receive something when you retire. You just might have to wait longer to get it, and it might be less than what you're currently told you'll receive. 

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#5) On July 15, 2009 at 10:23 AM, nottheSEC (78.62) wrote:

TMFBro I'm 44 and I do not see getting much from Social Security because of anticpated shortfalls. I would like a thank you letter for my donations or a refund of my contributions at a nominal 4 % interest compounded. I am of course planning accordingly.

also come ON  TMFBro... (If I were king of the world, I'd raise the eligibility age, but that's a topic for another post.) 

IMHO.. I won't take it anymore. When I started work the retirement age was 65 and a smaller reduction at 62. That contitutes a contract in the real world. The government is the only entity that can change a contract without fear of litigation. Raise the retirement age if you must BUT institute an age limitation say 18 not on 40-50 year olds who have lived in a different world.

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#6) On July 15, 2009 at 10:45 AM, TMFBro (< 20) wrote:

When I started work the retirement age was 65 and a smaller reduction at 62. That contitutes a contract in the real world.

Did you sign a contract with the Social Security Administration? I didn't. Plus, it wouldn't be enforceable, since we get a Social Security number at birth, and contracts signed by newborns are generally voided. 

Also, raising the eligibility age for Social Security doesn't change the "retirement age" -- you can retire whenever you want, as long as you've saved enough. 

One of my first articles for the Fool was anti-Social Security, so I understand all the frustration. But reality is, it's here, and it's unsustainable, so what's the solution? Given that one of the problems is that people are living longer, I think a reasonable solution is to require that people delay the benefits. Working until age 70 is not the end of the world when you're expected to live another 15 to 20 years. Don't want to work until age 70? Then save like mad while you're working. 

If I were really king of the world, my initial inclination would be to allow people to opt out, but then they are forbidden from receiving any kind of government assistance (Medicaid, SSI, etc.) for the rest of their lives. But then... what would we do with all the people who spend what used to go to FICA or make lousy investments (which hasn't been hard to do over the past couple of years)? 

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#7) On July 15, 2009 at 11:01 AM, outoffocus (22.91) wrote:

Social security should be a backstop, not an entitlement. Its original intent was to prevent the elderly from being homeless after retirement or being forced to eat cat food.  It shouldn't require that much money to do that. But now since we allow higher income people who (in many cases) have the ability to save for retirement eligible for social security, we have a system that no only surpassed its original intent, but will go broke as a result.  Social security should be like welfare in that your qualifications for the program should include income and assets, not just be your age. I say let your retirement pensions, IRAs, and 401ks run out first before you are eligible for social security.  That would drastically reduce the required annual outlays.  

I can hear the retirees and near retirees now sayin (but i worked for and paid into it, I should get my money....blah blah blah).  Thats all well and good but the REALITY is the fund was nothing but one big Ponzi scheme and it can't afford to pay you your money.   Something must be done and done soon.  All good solutions to this dilemma will result in someone getting less benefits but at least the problem will be addressed.

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#8) On July 15, 2009 at 11:13 AM, nottheSEC (78.62) wrote:

@TMFBro  

since we get a Social Security number at birth 

1)An identfication number is granted to everyone for the express purpose of well, identfication.We may choose to never work. i.e home makers   

 2) Most people enter the full time workforce in a meaningful way at age 18-22 depending if they go to college or work while they go to college. At that point they are no longer minors and they usally earn most ss credits.

 Did you sign a contract with the Social Security Administration

Yes I entered an agreement in accordance with contract law 

A contract is any agreement where there is:

a mutual exchange of promises with reasonable, understandable terms and conditions that binds the parties to performance of the responsibilities described.

Working until age 70 is not the end of the world when you're expected to live another 15 to 20 years

If you are 18-30 that would be correct you had the benefits of modern diagnostic medicine and nutrition for a lifetime. If you do not believe the validity in this.try a life expectancy calculator and input 18 and 50 with the same variables and see

http://moneycentral.msn.com/investor/calcs/n_expect/main.asp

 But reality is, it's here, and it's unsustainable, so what's the solution?

RAISE the age for people under 40. I think that unfair but it is more fair then telling a 55 y/o he is just gonna have to wait.

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#9) On July 15, 2009 at 11:53 AM, nottheSEC (78.62) wrote:

@TMFBRO  If I were really king of the world, my initial inclination would be to allow people to opt out, but then they are forbidden from receiving any kind of government assistance (Medicaid, SSI, etc.) for the rest of their lives.  It never makes sense unless you are rich from birth and plan to NEVER lose your income from work In fact if you have unearned income because you just trade for a living then it falls under uneraned income i.e. interest on savings deposits, stock dividends, and capital gains.You are not subject to FICA
   Lets says you make a million dollars a year from age 18 from your earned income self employment. OK $1,000,000 and your ss contributions

 

The FICA tax for 2009 consists of the Social Security tax of 6.20% (or 13.40% double if self-employed) on the first $106,800 of an employee’s taxable earnings (wages, salary, cash bonus, etc.)  OK $6,621 X 2( self-employed)=$13,242

plus the Medicare tax of 1.45%(2.9%) on every dollar of an employee’s 2009 taxable earnings. In other words, there is no employee earnings limit on the Medicare tax.= $29,000

Therefore if you make $1,000,000 a year from 18 until retirement at 65. 47 X $42,242 or about 2 million dollars. Ok if you rich take your social security money back but again note that will probably be smaller because as previously stated some of your income streams would be "unearned income",and not subject to FICA

However if you make an average of $40,000 for the same 47 years that woul be about $120,000. It would be foolish to seek your money back considering the benefit received including health care.


Coutresy of: http://blog.accountingcoach.com/maximum-fica-tax-2009/#ixzz0LLJ3BB9B&C

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#10) On July 15, 2009 at 11:57 AM, nottheSEC (78.62) wrote:

Again I expect to receive less. I have  investments BUT fair is fair. I hope to goodness that no poor person opts out to get the $120,000 back ( their 7.65% share of the 15.3) and needs expensive surgery.Passionate issue with me...J

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