A common theme is that Social Security is a rip off, a nearly worthless and totally unreliable pipe dream that will not be there when you need it. According to the Motley Fool the average Social Security recipient only received $16,848 in 2018. That’s an Alpo/Hamburger Helper kind of budget! But is it really that bad for everyone? It might surprise you to know that I can claim, without fear of contradiction, that when I receive my first Social Security check, it will be the largest one the United States Social Security Administration has ever written to anyone, in history.
The only person’s Social Security information I have access to is mine, and my spouse’s. Since she became a stay at home mom early in her career, she will be drawing a Social Security benefit that is half of mine because that is larger than her nine years of earnings would pay her based upon her contributions. What will our checks look like when we decide to start drawing them?
According to the my social security account site when I start drawing Social Security in seven years, my annual benefit will be just over $47,300 and hers will be half of that or $23,700. The total for the two of us will be $71,000. That is a whole lot higher than the average benefit of $16,848 but it is right from the horse’s mouth and since I will begin drawing my benefits well before the trust fund goes under, I think it is pretty secure. Now if you are a millennial, I agree, all bets are off, but I think the chances of Congress getting anything done to help or hurt the status quo in the next few years are pretty slim.
So, an inflation adjusted benefit of $71,000 annually is a pretty fat pension and unlike private, state and local government backed pensions mine is backed by the people with the printing press that prints money. In fact, the majority of people on the early retirement journey in this community are probably planning on living on less than $71,000. So, if I were marginally more frugal I could comfortably sail into retirement with nothing but my Social Security checks. And where have you heard of anyone living comfortably on just Social Security?
Now to tell the whole truth, in my case I will not be limited to Social Security for my retirement spending. I can also safely withdraw six figures from my investments at a 3% withdrawal rate. And that is because I saved aggressively and invested over quite a few years. However, the main point I am trying to make is that my numbers are in conflict with the commonly held belief that nobody can live decently on just Social Security. I think almost anyone in a low cost of living area who has no child care expenses and a paid for house could live decently on $71,000 a year. Because, remember when you are drawing Social Security you are either already eligible for Medicare or only a few years away. Health insurance prices aren’t a factor at that point.
From reading blogs in the early retirement space, I know that a great many FIRE advocates are planning on living expenses of $25,000 to $50,000 per year and also plan on using a 4% withdrawal rate. That means their target amount of invested assets only needs to be from $625,000 to $1.25 Million. My Social Security income stream at $71,000 is going to be equivalent to $1.775 Million dollars of investments! I think many, maybe even most in this community would feel pretty good about pulling the trigger on retirement with a portfolio of nearly $2 Million. It would not be sufficient for a high cost of living area, the awesome Financial Samurai has shown that $5 Million or more is not an unreasonable amount to shoot for if you don’t want to run out of money in the most expensive metro areas of the US. But I live in a rural part of a poor state and $71,000 is larger than the median family income in these parts.
This all begs the question of why all this talk of massive savings rates and frugality in the FIRE community? Why not just spend every penny you earn because Social Security is going to provide you a very healthy income, even if you don’t have a single dollar in savings when you retire? Why not indeed. Well, there are a few obvious problems with my logic and a few others that you might not know about. First, I’m talking about Social Security income. And for some mean-spirited reason the federal government makes you wait until you are at least age 62 to qualify. And unless you wait until 66, or better yet 70 years of age, you will be penalized with reduced benefits. FIRE devotees are not planning on working until they are old, nobody wants to do that except Warren Buffett who is way past 70. So, the Financially Independent, Retire Early crowd still has to come up with some way to survive between leaving their 9 to 5 and making it until they are senior citizens when those fat SS checks start rolling in.
But the other biggest problem you may not be aware of with planning on relying on Uncle Sam for your main source of retirement income is that you aren’t me. My work history isn’t like yours, I can guarantee you that because I’m the guy the Social Security people never anticipated. I’m their worst nightmare, which is why they will have to write me an outsized check. The way the SS folks calculate your benefits is based on your inflation adjusted wages over your 35 highest earning years. And those wages are only counted up to a maximum amount called the wage base. If you earn over that amount you don’t get taxed on the excess earnings. Last year that amount was $128,400 but when I started work the maximum wage base was only $17,700. All that is to say I paid the maximum amount possible into Social Security for every single year of my working life until the year I retired. And I also worked for 35 years so there is no other person my age on earth who has paid more than I have in Social Security taxes. And because I paid the maximum theoretically possible, I will also receive the largest benefit possible under the program. And like I said, you aren’t me. The only other people likely to be in my place are doctors, and considering the length of their college, medical school, residency and possibly fellowships not many of them are going to have a 35 year career with every single year above the maximum wage base.
Not only are most FIRE candidates not going to earn over $128,000 every year of their working life but they also aren’t going to work for 35 years. I mean that is the whole point of FIRE, to be able to escape the daily grind at least by their fifties, if not in their thirties or forties. Many will continue to earn after they early retire, but a lot of those plan to keep their gross incomes low after they retire in order to qualify for ACA health insurance assistance. That is going to reduce the size of the Social Security checks that they get someday, when they are old, to something that looks more like today’s average number of $16,848 per year.
Because of that I think FIRE people are generally correct to not count on Social Security as a major contributor to their income in their advanced years. I think it will still be in existence but I do not think most will have contributed enough to have earned a big monthly check. And that is not a bad deal because by not giving the government as much in Social Security taxes as I did, they will be able to invest that money at a far higher rate of return than I will get back in my Social Security payments.
I am unique, I not only hold the world record for the most money any human has contributed to Social Security over my 35 year work history, I will also qualify for the largest Social Security benefit ever earned in this country. And you won’t, and you should be glad because even though my wife and I will be getting a nice stipend from Uncle Sam in a few years we paid dearly for it. With any luck you will pay a lot less and make way better use of that money!
Is it fair for anyone to get $71,000 from Social Security when they already have more investment income than they will be able to spend and when the average American only gets $16,848 per year?
Is Social Security a good safety net for elderly people who have no other source of income?
Do you dispute that nobody has paid any more in Social Security taxes than me?
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