Provide, provide

Sooner or later, the nation’s eye will turn to Social Security. Advocates of reducing benefits say, “We can’t afford it.” The question then becomes “Can afford it?”

The average monthly Social Security benefit is $1,348, or $16,176 a year. That’s not much, and Social Security was never meant to be a full-blown pension. On the other hand, Social Security is a vital part of most retirees’ lives.

Ida May Fuller, first recipient of Social Security.

According to the government, 48% of married couples and 71% of unmarried persons receive half or more of their income from Social Security.  Twenty-one percent of married couples and 43% of unmarried people rely on Social Security for 90% or more of their income.

Social Security has two features that are particularly important to retirees. First, it’s a guaranteed lifetime income. Your Social Security payments last as long as you do.

Second, Social Security payments are protected against inflation, which is the enemy of anyone who lives on a fixed income. The effects of inflation are cumulative: After 10 years of 3% inflation, a $1,348 payment has the buying power of $10,148 – a 24% decline.

If the nation no longer wants to fully support Social Security in its present form, you will have to make up the slack. And it’s not cheap.

How much money would you need to replace the average Social Security payout? We can get a rough indication from the annuity industry. When you buy a basic immediate annuity, you get an insurance company’s guarantee of income for life, just as you do from Social Security. An immediate annuity is a bet with the insurance company. If you get hit by the 9:15 southbound Cannonball Express a week after you buy the annuity, the insurance company keeps your money and you lose. If you live to 115 while smoking cigars and drinking whiskey, the insurance company pays out more than you invested, and you win.

Most annuities aren’t adjusted for inflation. The Vanguard Group does offer an annuity whose payout raises 3% a year – roughly the inflation rate since 1926. To get a monthly starting payout of $1,300, here’s what a person born in Pennsylvania on 3/8/1952 would need:

 

Female life only $256,960.37
Female life only with 2% graded payment $317,264.07
Female life only with 3% graded payment $355,450.39
Male life only $240,346.76
Male life only with 2% graded payment $293,254.43
Male life only with 3% graded payment $326,409.49

Male policies are cheaper because we die earlier than women. It’s just the way it is.

Bear in mind that Social Security offers other benefits, such as disability payments and payments to surviving family members.

The bottom line: Let’s say you were counting on an income of $50,000 in retirement, and that $16,000 of that was from Social Security. Conventional wisdom says that you can only safely withdraw 5% of your investment kitty each year if you want to adjust your payout for inflation. To get $34,000 a year in investment income, then, you’d need $680,000. To make up for the loss of Social Security, you’d have to add another $326,000 to $355,000.

No one is talking seriously about abolishing Social Security – which, as a reminder, has its own stream of tax revenue for funding. But every reduction in benefits means that you have to make up for it. Provide, provide!

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