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