As a financial coach, I focus on how behaviors and mentalities affect my clients’ results. I also sometimes consider how public policy affects these results as well, and sometimes have to say something about how legislators’ actions affect what we can and cannot do; Social Security is just one of those policies that irks me to the core.
Social Security is one of the most socially ingrained government programs in America today. Since President Franklin Roosevelt signed the program into law in 1935, it’s been there to provide senior citizens some income in their golden years so they would not be hanging out to dry.
Initially, this appeared to work just fine, especially when the worker-to-retiree ratio was 159 to 1. However, that ratio is now down to just three-to-one, and the estimates put Social Security at insolvency as early as 2034, right before its 100th birthday.
I could go on about the philosophy of this program and the merits from a political standpoint, but that’s not my objective here. Rather, I want to look at this from a financial coach’s perspective, and show how this program has not been benefiting Americans the way the media claim.
The math behind Social Security is absolutely abysmal, to put it lightly. Not only is the program itself fiscally unsustainable, but it hardly gives any sort of true return for people who plan to rely on it during their retirement years.
Once you get past the pundits’ partisan pandering, here is what Social Security is actually doing for (to) Americans.
The median household income in the United States, as of 2018, is approximately $62,000. The Social Security tax is 12.4%, half from the employer, half from the employee (but the entire 12.4% for self-employed folks). That equals about $7,700 per year.
Imagine if, instead of federal bureaucrats taking 12.4% of your income annually over a working lifetime, you put that $7,700 into an IRA. That’s about $640 a month. And let’s do that over a working lifetime, from age 25 to age 65, investing into good funds that average about a 10% rate of return (which is a very reasonable expectation).
If this hypothetical person even remains at an average of $62,000 for his or her entire life, but puts what would have been Social Security tax into that IRA, by the time age 65 rolls around, that’s about $308,000 total put in.
But, with 10% annual growth, that $308k will have grown into $3.39 million. Even if the rate of return is only 6%, that’s still $1.18 million at age 65. And if somehow the average annual return was 14%, that $308k would have become a staggering $10.3 million!
This chart shows what that growth would look like over a working lifetime.
On the other hand, consider the average Social Security payouts. In 2019, the average monthly benefit paid to retirees was $1,461 a month, or $17,532. That’s just barely above the federal poverty level of $16,910 for a family of two.
What if you have that $3.39 million in your IRA, and keep it invested getting 10% each year? That’s an average growth of $339,000 each year. Even if you drew only 4%, that’s $135,600 per year, or $11,300 a month you could draw for your living expenses.
Could you make it on $3 million? Or $1 million? To me, there is simply no question about where the better deal would be.
In spite of Social Security taking its cut of our earnings and not giving back, there are still other opportunities for you to grow your net worth and become financially independent and free.
Note: This article was published by Financial Coach Seth Connell in February 2020. It has been reprinted with permission.
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