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
(ssa.gov) 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 ssa.gov) 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,
Roger
“Great wealth can be a fortress, but poverty is no protection at all." Proverbs 10:15 CEV
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