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.
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
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 :
- Most Americans could have a million dollar by the time they retire. I thought I could be one of them.
- All I had to do was max-out my retirement accounts,
- 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.
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.
There’s also an added benefit of living a rich life. You live longer. This chart speaks for itself:
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)