An alarming article appeared in the New York Times yesterday saying that social security is now beginning its first real steps towards insolvency. That’s right social security is facing its first shortfall in more than a generation.
You need to plan for this. If your retirement plan is based on hope and the belief that politicians will solve this, you’re taking a massive risk with your twilight years.
So What’s the Situation?
The latest projections from the government reveal that from 2022 social security now has to start utilising the so-called ‘trust funds’ it operates. It must now start drawing down on these assets, as if social security was entering retirement itself, due to the fact that the Social Security Administration will be paying out more than it receives back.
The scary thing is that social security will deplete its assets within 15 years. But to make matters worse the number of old people is increasing. By 2060, we’re expected to see the number of senior citizens double to over 98 million.
There’s now more strain on the social security system than ever before, and that strain is only going to increase.
So what happens if Congress does nothing about social security?
You’ll see a cut of around 20% in your social security checks. That was something we previously considered unthinkable.
The Peter G. Peterson Foundation estimated that the population of the US will be 370 million in 2034, and they predicted that this could mean your annual social security check in today’s dollars could be reduced by $5,969 per year.
Most Americans would be forced back into the workplace unless they had a gold-plated private pension.
Or they would be eating out of trash cans.
Is this as Unthinkable as it Seems?
The ‘Third Rail’ of American politics is what social security has often been called. It’s an entitlement no administration would dare try to touch. It’s why in 1983, under the Reagan Administration, there was such a push for a deal to save and preserve social security, which was achieved.
But anyone who has watched the incompetence and the vile callousness of the Trump Administration now knows that nothing is sacred in today’s America. The conventions you all grew up with are no longer valid.
To put this into context, a quarter of all working age Americans have nothing saved for retirement. These are the people who will be relying on social security.
The Tax Cuts and Jobs Act (TCJA) and the presumed end of the Deferred Action for Childhood Arrivals (DACA) allowed social security to survive until 2022 without paying out more than it received.
Here’s what its report revealed:
· 2019 — +$29.3 billion
· 2020 — +$16.8 billion
· 2021 — +$3.3 billion
· 2022 — DOWN by $18.2 billion
· 2023 — DOWN by $46.4 billion
· 2024 — DOWN by $75.7 billion
This is very real. I love numbers because numbers don’t lie. It’s not as easy as fiddling around and making these negatives turn into positives. It’s what we’re looking at now.
A Real World Example of the Impact
To display what this is looking like for the average worker, I’ve borrowed an example using the latest social security study.
First of all, expect to see cuts to social security payments around 2034, under the current law, at the earliest. So if you’re already old and planning on dying before then you’re good.
Here’s what an average American is looking at:
Woman X earns an average of $51,795 per year over the course of her working life. This is pretty standard. She’s not rich but she’s not poor either.
Under the current system of inflation-adjusted social security payments, she’s entitled to $27,366 per year. For someone who’s retired, it isn’t bad. She may own her own home and she may have an additional private pension coming from somewhere else.
Now if these cuts come into force, Woman X gets $21,669 per year. Can the average retiree survive a cut in their income of 21%?
I think not.
Why is this Happening?
Administrations like to justify their salaries by conducting studies into the blatantly obvious. Here’s just one government report stating the obvious about why social security is experiencing problems: https://www.ssa.gov/OACT/TR/2017/tr2017.pdf
But it’s the same problems an imbecile could list:
Life Expectancy — We’re living longer. In 1960 the average life expectancy was 69.8 years. In 2017, it’s 78.5 years.
If we look at Woman X again, that extra nine years of social security under current conditions means an additional $246,294 the Social Security Administration has to find.
And her situation isn’t particularly out of the ordinary. Take this figure and multiply it by hundreds of thousands. You can now see why us living longer is killing social security.
Too Many People Retiring — It’s estimated that there are 10,000 people retiring every day. This is because the Baby Boomer generation is firmly entering retirement.
It Takes Three Workers to Support One Retiree — That’s right, it takes three workers paying social security to support one retiree. People just aren’t having enough children, so there aren’t enough workers to support this generation.
You can argue as to why this has happened and what we could have done differently. But it doesn’t matter. The numbers don’t add up.
We can’t maintain the standard of living that retirees currently enjoy.
Sure, laws might postpone it for a while, but sooner or later we have to face facts.
Things are going to change.
The standards of retirement enjoyed today were an anomaly. Living off the country’s generosity is no longer possible.
You need to plan for your own retirement.
It’s Not Just the US that Has this Problem
The world’s population is getting older in general. Better standards of living and improved healthcare are contributing to this. You’ll see these problems in Japan, South Korea, Australia, and across the whole of Western Europe.
This is far from a US problem. It’s a world problem.
How Am I Planning for Retirement?
I plan for the long-term because I’m either sensible or anally retentive, depending on who you ask.
I don’t pay into state social security in my own country. I disavowed my country and declared myself a non-resident. They changed the rules to stipulate that you need to have fifteen years of contributions to get anything out of it.
I have no intention of living in the UK again. So why would I pay into that system knowing I’m unlikely to get anything back at the end of it?
I also don’t trust the government to actually keep its word over such a long period of time, so I’m just not participating.
By being self-employed, I also don’t have the advantage of any golden pensions from my employer. So I can forget about that.
I’m content with the fact that nobody will ever give me any form of pension when I retire. I accept that. But I plan for the long-term. I save a lot of money and I live frugally, so I know by the time I retire I’m going to be fine.
But too many people don’t take responsibility. They rely on other entities to support them in their retirement.
That was fine when your parents were retiring, but it won’t be happening to you.
How Should You Plan for Your Retirement?
1. Change the Way You Think About Social Security
My first piece of advice is to treat social security as a bonus. It will equal an extra few thousand dollars per year. It should NOT be your main source of income in retirement.
If you try to make it your main source of income, the only way you can do this is by leaving the country. I know plenty of Americans who live in places like Mexico who live solely on social security. They can because their money goes a lot further there.
2. Focus More on Your Investment Portfolio
Everyone should be investing in something. Even if it’s just a little, the power of compounding over time will make it into a significant sum.
The generally accepted amount you can safely withdraw from an investment portfolio in retirement is three or four percent.
Your investment portfolio must match nearly all of this when you’re retired. It should be covering the current inflation rate of 1.6%, and preferably more than that.
You should be contributing to it every single month and most of your portfolio should be on the conservative side of things. Your retirement fund is not something to take big risks on.
I’m not going to go into specifics about WHAT you should invest in right now. Just know that you should be investing and most of it should be in low to moderate risk assets.
3. Max Out Everything
Social security might be going the way of the dodo, but private pensions are still a great way to preserve your standard of living throughout retirement.
My advice is to max out everything you can. Any IRA should be maxed every single year. You want to take advantage of everything.
Your private pension will become the new social security. So make sure you max this out every single year, even if it means cutting your spending now.
4. Buy a House
The classic symbol of the American Dream was to own your own home. Many millennials are turning away from this, for a variety of reasons.
I recommend you own your own home, if you can make it work. Retirees don’t pay a mortgage and they don’t pay rent. This is around 30% to 50% of their total spending every month. To get that back is a gamechanger.
If you’re still paying rent as a retiree, you might find that you’re barely surviving.
I know it’s not easy these days, but this should be a big part of your retirement plan.
5. Have Some Liquid Cash
Some Americans say that you should invest everything you can and max out everything you can. I agree with the logic behind it, but if I were you I’d always have some liquid cash on hand that can be easily accessed, even in retirement.
Everyone knows you should always have six months’ worth of expenses. I believe you should have at least a year, especially if you’re approaching retirement.
You never know what might happen and if you throw everything into a fund you can’t easily get that money out at short notice.
In my article Budgeting is Good…But Here’s How to Do it Better I mention how I divide my assets on my net worth spreadsheet.
I also divide them by how easily accessible they are. I have sections for long-term assets that could take months or years to liquidate. I have imminent assets, which are assets I’ll have access to within a couple of months. Then I have my easily available assets, which are things I can get access to within days.
Have one years’ worth of assets you can easily access. I’m a more conservative investor and I always believe it’s better to be safe than sorry.
How are You Planning for Retirement?
This is a lot to take in. The revelations about social security may require you to pivot, and quickly. My advice is to start immediately. This is not something you can afford to put off.
How are you planning for your retirement?