By: Dividend Sensei
You Need Substantial Personal Savings To Augment Social Security
According to the Bureau of Labor Statistics older households, defined as those run by someone 65 and older, spend an average of $45,756 per year, or roughly $3,800 a month. This is why a 2017 report by Merrill Lynch estimates the average retirement costs $738,400 ($275,000 of which is out of pocket medical expenses not covered by Medicare). Or more specifically the amount the average couple needs to have in retirement savings (assuming withdrawing 4% of your savings each year), is $738,400.
That’s factoring in the average Social Security benefit, a 20 year retirement (starting at age 65), and the risk weighted healthcare costs (senior living expenses can run up to $120,000 per year, per person). In other words, a retired couple needs a nest egg of nearly $750,000 in order to enjoy a safe and comfortable retirement. In reality most households are far short of that goal. Which brings us to the most important fact of all
Social Security Isn’t Going Broke…BUT It Is In Trouble
As a tool for combating poverty among the elderly Social Security has been a roaring success. According to the Center on Budget and Policy Priorities thanks to Social Security the poverty rate among Americans 65+ is about 9%. Without the program it would soar to about 40%. In effect Social Security has reduced poverty among retirees by about 75%.
However the program is in deep trouble, which is why there is a common misperception that “Social Security is bankrupt”. This stems from the fact that by 2035, according to the Social Security Administration, the number of Americans aged 65 or over will increase from 49 million to 79 million. This means the ratio of workers/retirees will fall from 2.8 today to 2.2. Social Security is a “pay as you go” system funded by 12.6% payroll taxes. According to the latest trustee report, “Over the program’s 83-year history, it has collected roughly $20.9 trillion and paid out $18.0 trillion, leaving asset reserves of $2.9 trillion at the end of 2017 in its two trust funds.”
As the number of retirees rises over the coming years (about 10,000 per day), the Social Security Trust fund will begin to decline in 2018 as the total benefits exceed program income (including interest on the trust fund’s special Treasury bonds). By 2034 the fund will be completed depleted because at present the program’s unfunded liabilities are $13.2 trillion (through 2092). This means that in 2034, if nothing is done, then Social Security will run out of reserves and have to be fully funded only out of payroll taxes. Assuming the current 12.6% remains in place this means a 21% cut to benefits.
The good news is that this means that Social Security, as its currently constructed, literally can’t “go bankrupt”, since payroll taxes will continue flowing in as long as Americans are working. The bad news is that for tens of millions of retirees that will be a huge blow to their income. For millions of those it will mean plunging into poverty. Fortunately this is a worst case scenario that will only happen if Congress (who last tweaked Social Security in 1983) does nothing. There are several ways to fix the program, as well as ways for you to prepare yourself to better meet your likely retirement funding needs on your own. Those solutions will the the topic of my next article.
I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.
October 14, 2020
May 22, 2019