The #1 reason we should all prepare for retirement now

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Let’s be simple and factual with this one. According to the 2016 Social Security report, its trustees estimate that the fund will be depleted in 2034. In less than 20 years, Social Security funds for retirement and medicare will basically be 0$.

Social (in)security

Because Social Security’s costs are higher than its income, it expects to be able to fund roughly 75% of all liabilities after that. Knowing that the average payout is 1200$/month, it would then go down to 900$/month (at least, it will be inflation adjusted).

Social Security’s fund will be depleted in 2034

Not exactly good news.

I don’t see how any politician will let that happen and commit political suicide, so I think instead, we’ll see a mix of 3 policies to tackle the problem:

  • Extending the working age beyond 67 years old (70? or maybe 73?)
  • Increasing social security taxes,
  • Reducing the pay-outs for medicare and retirement

Or a combination of the three. None of which are going to be popular.

I see the wealthiest footing the bill as the likeliest option. There’s no way people will elect someone who’ll decide to significantly cut pay-outs or push the retirement age. The rich will be unhappy for a while, but they’ll be just fine.

What matters is how today 60% of all retirees rely on Social Security for more than half their retirement income. These folks will be the most impacted.

Income of retirees

Smells like Millenials Spirit

Of course, most of the financial consequences in retirement have roots in the earlier parts of our life. Americans were saving north of 10% of their income in 1970s, they now save around 5%.

Couple a low savings rate with a Social Security fund that depletes in 2034 and I would highly encourage millennials to start saving NOW. Because there will be nothing left when you retire.

The worse is that the media know what the solution is, but they make it sound ultra complicated and unattainable.

See this extract from a Bloomberg article (emphasis mine):

Retirees in the top quintile of financial wealth were spending nowhere near an amount that would place them in danger of running out of money. In fact, the average financial assets of wealthy retirees increased during this period and most retirees spent less than their income.

In other words, these affluent Americans retired and then continued to get richer. That’s quite a feat when you’re no longer working

Seriously Bloomberg?

Or maybe these retirees had planned for this and spent less than they earned for the 40 previous years and built a retirement fund? How is that considered a feat?

Taking action now

A few years ago, I thought it would probably be safe to assume that I’d receive no retirement income from the government past age 67. If I do, it would be an added bonus, I’m just not counting on it.

When I started my journey to Financial Independence, I realized that :

  1. Most Americans could have a million dollar by the time they retire. I thought I could be one of them.
  2. All I had to do was max-out my retirement accounts,
  3. And invest in productive assets.

That became my strategy, which is nothing more than a wild guesstimate of how early I could be ready for retirement. But it’s working out alright.

The most important criteria being to spend less than I earned. This ‘magical’ concept that Bloomberg (and others) are trying to make sound so magical is math of the most basic type that everybody understands.

Below is an estimate of the number of years until retirement if you plan to retire with your assets’s income.

Savings Rate
Savings Rate vs Years of work

If you want to comfortably retire before 2034 and you currently have no savings, you need to save 40%+ of your income right now and for the next 18 years. The earlier this process is started and the higher the savings rate (read 50%+) the higher the chances to retire comfortably, and early.

Additional Bonus

There’s also an added benefit of living a rich life. You live longer. This chart speaks for itself:

Life expectancy vs wealth

Is anyone counting on Social Security / Medicare when they retire? Do you plan on having your retirement fully funded when you reach 67? Do you plan to retire spending more than you earn? (just kidding on the last one haha)

-Nick

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12 COMMENTS

  1. Spend more than we earn – challenge accepted! Kidding of course. 🙂 That;s funny that bloomberg calls that a “feat” because like you pointed out, that was probably the “welathiest’s” plan all along. Save well, reduce spending and live off less than waht comes in each month for income. It’s pretty simple really.

    As far as Social security – we generally don’t put it into our retirement planner/calculator becuse we don’t want to depend on it and things going askew if it isn’t there. Adding it in however, gives a nice sigh of relief (if it is actually there) because it just boosts our success rate even higher, lol. To reiterate, we’re not abnking on it and if it happens to be around and something we can draw on as well, sure, we paid into it, it will be a nice little boost every month, hwoever small it may be. 🙂

    • If spending more than we earn was the solution, I’d be first to use the technique.
      The media is so biased on this, it’s sometimes downright annoying.
      Good that you aren’t counting on Social Security, it’s a safer plan. We’re doing the same. And adding a extra margin to it as well. If it becomes available to us, sure we’ll take it!

  2. I agree, not a “feat”, Bloomberg — just common sense and looking ahead to what can reasonably be expected to appear in my life.

    As for Social Security, I set my investment targets as if it won’t be there for me or my spouse. That way, whatever level happens to be there will act as an extra guard against running out of money late in retirement.

    Medicare, well, that I’m not sure about yet. I’ll talk through possibilities with my (retired) parents.

    Planning on being fully funded for Financial Independence by age 55 (in five years), and retirement by age 60 (five years thereafter). Actual date is in flux right now, as the household prepares for the major family commitment of hosting my mother-in-law and fostering my niece. Technically speaking, though, I’m coming out of retirement to do this. 😉 My wife will likely never retire, as she’s too employer-addicted. :-b

    Spend more than earn, HELL YES! Well, only after I’ve retired again, of course. Unearned (investment) income for the win! 😀

    • So you will be retiring twice? 😀
      It’s nice that you are so close to your family and taking care of them. I’m sure this is going to be a major change and one that you are going to enjoy.
      Wouldn’t it be nice if we could all spend more than we earned?

  3. Thanks for putting in the time to share relevant research and data in this piece, Nick. Though I’ve seen the savings rate/years of work correlation many times, it is always inspiring to read it.

    As a current teacher in the state of Illinois, I do not have the luxury of counting on social security, as my earnings do not make me eligible to receive social security. I will receive a pension, but I’m not counting on that money either. In fact, I’m hoping to leave teaching and roll over my pension earnings in the next 1-3 years, depending on how quickly my current career transition moves ahead.

    • Thanks Hero! The rate of savings has a huge impact on the early retirement date. A 10% increase is several years less of working!
      Teaching is a wonderful job, you make all these kids smarter. What we will you transitioning your career to?

  4. I’m not counting on Social Security, it’ll just be a little extra bonus to have that income. Sadly, politicians will continue to kick the can down the road because they don’t have the courage to do anything about it in the present as many power groups would be upset. I’m pretty lucky I guess in that I have a defined benefit plan…though it is a bit of a golden handcuff. Being that Social Security and Medicare is constantly being funded, I think it’ll always be there…it will just have to be reduced. Although there is a possibility that it will be means tested I guess.

    • Hi Andrew – Lucky you, defined benefits plans are getting rare these days!
      Europe has similar issues and they haven’t addressed it either, so you’re right that politicians might to tempted to kick that can a lot further down the road.

  5. It’s definitely scary how many people are not taking retirement planning very seriously. Social security was never meant to be the sole source of retirement income; just enough to supplement. The reality is that it will all fall square on our shoulders.

    According to Michael Kitces, 2/3 of the time a retiree finishes with 2X their original starting balance, with the median standing at 2.8X the original balance. If my portfolio goes in that direction, then I’m definitely going to enjoy more than I am right now!

    • I’d guess that a lot of people see it as a difficult task to plan for something that is 10, 20, 30 years or more in the future. If social security was originally meant as a supplement, now at 50% of most retirees’ earnings, it has become an integral part of their retirement expectations.
      The key is to start as early as possible!

    • You’re absolutely right! I couldn’t wrap my head around it myself until my retired uncle told me about his struggle. It sometimes (always?) pay to listen to older generations’ advice.

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