Friday, October 27, 2017

Was Merle Haggard Right? (Part 2)

Last week I delivered the bad news you may already have known if you’ve ever looked up how much Social Security will pay you in retirement: it will not replace 100% of your income from the workplace—or even the 70% of pre-retirement income financial planners say you will need.  But then again….When experts say that Social Security will, on average, replace 40% of your annual income from your working years, they apparently mean 40% of your gross income.  And unless you are living way beyond your means, you do not live on your gross income.  Taxes take a big cut, maybe as much as 30% for even the average worker when all payroll taxes—including FICA, which funds Social Security—are counted. (If you are afraid taxes will still hit you hard in retirement, read my April 28 and May 5, 2017, posts, “IRA, RMD, IRA, OMG”.)  You may already be living on “70% of your pre-retirement income”.

So a worker with a $60,000 salary would gross $5000 per month.  Take away that 30% to arrive at a net paycheck and it’s more like $3500.  (For simplicity’s sake, we’ll not consider in this calculation that the employee’s net income may have been further reduced by contributions to a 401(k) plan, an expense he will not have in retirement.)  If he draws that estimated $2100 Social Security check monthly (see last week’s post), he already has climbed to 60% of the actual income on which he has been living.

To close the gap, this retiree would most likely look next to his retirement savings account(s) like 401(k) plans or Individual Retirement Accounts (IRA’s).  As a rule of thumb, financial planners often recommend withdrawing just 3% to 4% each year from such accounts as a way to stretch that money over a retirement that might last 30 years or even longer.  Assuming a relatively modest $150,000 balance, 3% annual withdrawals yield $4500 per year, or $375 per month.  Now he has reached 70% of his net income from his working years.

If there’s no pension or other steady source of income, he will probably need to work at least part-time or seasonally to reach his desired standard of living.  Working is not such a bad fate if you can choose something low-stress and enjoyable.  It doesn’t have to make you rich.  About $12,000 per year for this worker would do it. 

To recap, his situation looks like this:

$5000      Monthly pre-retirement income (gross)                   $2100      Monthly SS benefit

                -1500       Taxes (FICA, federal, state, local income)                  375      Monthly income from 401k)

                $3500      Net monthly income                                                +1000     Monthly employment income

                                                                                                                  $3475    Monthly Retirement income

But to me, even that $1000 per month employment income sounds like more of a demand than it should be for a retiree.  Personally, I think debt reduction is a much better way to make ends meet. reports that 73% of Americans die with debt.  The average amount is $61,554, or $12,875 if not counting mortgage debt.  The payment on that takes a big chunk of one’s income in retirement.  Eliminate that and I’d wager you could live on less than that proverbial 70%.
You can also stay in the full-time workforce a couple of extra years and thus delay claiming your Social Security benefits.  When you go online to check your own benefits, look at what a difference it makes in the monthly benefit to wait until age 70 to collect.  Even if you don’t want to wait that long, each month you delay increases your benefit and closes the income spread a bit more.
Consider downsizing your living space.  If selling a house to do so, bank the profit realized by the sale to draw on for regular income.  Or just eliminate clutter; sell your excess stuff.  Your heirs will appreciate not having to do it themselves after you’re gone.
I don’t recommend them, primarily because they come with high expenses, can be complicated, and may leave your heirs with some headaches and probably without the house; but homeowners age 62+ and meeting a few other requirements can convert the equity in their home to a monthly income stream—a reverse mortgage.  Just be careful and make sure you understand the terms and conditions of the loan—because it is a special type of loan.  The mortgagor does want to get his money back, and that will probably be effected by taking possession of, and selling, the house rather quickly after you die.
I hope I’ve given you cause for optimism.  We can discuss the viability of the Social Security system some other time, but I’m pretty upbeat about prospects for yours and my retirement.  Keep saving!

Until next time,



“If you plan and work hard, you will have plenty.  If you get in a hurry, you will end up poor.” Proverbs 21: 5 CEV

Friday, October 20, 2017

Was Merle Haggard Right?

Country singer Merle Haggard recorded a song in 1982 that included the line “keep…your so-called Social Security”.   That came to mind recently when a friend took my advice and went on the Social Security Administration (SSA) website ( to get an estimate of what she can expect to collect when she retires.  She was not happy with what she saw.  Her projected monthly benefit is far less than not only her current income but her current monthly expenses.  That experience speaks to a fundamental and widely held misunderstanding of what Social Security is intended to do.  By itself it is not likely to ensure security, social or otherwise, for most people.
Far from being a full replacement of one’s working income, Social Security is intended only to provide a foundational income in retirement years, to afford retirees a base for financial and (together with Medicare) medical stability.  Nevertheless, for about a quarter of retired Americans collecting Social Security benefits, that monthly deposit from Uncle Sam into their bank account is their sole source of income.  This year the average monthly benefit is about $1366.   Consider that when the Social Security Act was signed in 1935, the law set the age at which someone could collect his retirement benefit at sixty-five.  I’ve checked a couple of sources, and the average life expectancy of an American male in 1935 was just over sixty-one years.  As someone wryly observed, Congress back then could do math.  Clearly, the program was not meant—nor anticipated—to fund a decades-long retirement.
So realistically, what can you expect Social Security to do for you?  For starters, it will likely replace only about 40% of your income, assuming you are not on either extreme of the income scale during your working years. To qualify for the highest monthly benefit, just north of $2600, you would have had to earn the maximum annual salary that is subject to Social Security taxes—which is currently $127,200—for thirty-five years. (The Social Security Administration calculates benefits based on your highest 35 years of earnings.)  That is obviously less than 40% for that high earner.  But what if someone made half of $127,200 ($63,000) per year for 35 years?  Would they just get half of $2600 ($1300) as their monthly benefit?  Actually, no, they would probably qualify for something in excess of $2100 per month.  The formula used by SSA is purposely skewed to replace a higher percentage of a low-wage worker’s income.  In other words, a minimum wage employee will likely qualify for retirement benefits well in excess of 40% of his pre-retirement income.
 Financial planners tell their clients to plan to replace at least 75% to 80% of their pre-retirement income after they retire. Depending on the nature of their expenses, 100% might be more realistic for some.  So by that measure Social Security comes up woefully short.
On the other hand, that 40% is a good start toward the approximate 80% you might need.  How can you close the rest of the gap?
First, look into whether you have a pension due to you.  There are fewer and fewer workers covered by these defined benefit plans; but if you ever worked for an employer that offered one, checking that source is your second step (after checking your SS benefits at to determine how much income you qualify to receive in retirement.  Unless you worked 20+ years for the same employer, it’s not likely to be a huge monthly check; but remember, it’s in addition to Social Security.  Unless you were not paying Social Security payroll taxes while working for that employer (e.g. if you were a government employee) that pension does not diminish your Social Security benefit.
Still not up to the magical 80% (or whatever figure you’re trying to reach)?  Then next week let’s look at some ideas to financially secure your post-work years.  (Hint: It might not be accurate to call them “post-work”.)
Until next time,
“Great wealth can be a fortress, but poverty is no protection at all." Proverbs 10:15 CEV