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?
If you’d like to comment then use the comment box or click on the title of the post!
Awesome post and thanks for sharing concrete numbers. I tried being financially independent on 700k invested. It is still amazing, although I don’t have a home or children. I haven’t paid into any social security or equivalent for 7 years now. You are right, I did much better than the best social security or equivalent programs out there. I am planning a family now, and live in Singapore, so my cost will go up. Back to work for me for an anticipated 5 years. I will be fine once I cross the two million dollar threshold. I know that because I lived very comfortably on a third of this for two years. I don’t trust any social security/ pension program. Knowing Germany, Australia, Singapore in depth all of them are underperforming compared to what you and I can generate off our savings (blind folded).
Congrats Gladiator! It is clear you are a planner and not a drifter. Definitely I would always feel better with me controlling my money instead of the Feds of any country.
Thank you, Steveark! That is an interesting point you raise. If i remember correctly social security funds were ‘borrowed’ by Congress to fund the Iraq and Afghanistan war? For me that is super sad. I’d rather lose the funds and work forever than supporting any war.
I love the thought process in this post. I do think it is fair that someone who makes more money should get a higher benefit, based on how much they’ve put into the system. I’m not trying to downplay how hard it is for the average person to survive on the “average” amount of social security though.
I agree that unless you are older, we really don’t know what is going to happen with social security. I hope it will be there, considering how much I’ve put into the program for 16 years or so, but who knows. But I’m going to pretend like it doesn’t exist so I can put myself in as strong of a spot as possible.
I made sure I had enough without Social Security because of my general distrust of government’s ability to keep their word but I’m fairly confident that while it might be reduced some in the future that it will not be discontinued. Even in your case I suspect it will be enough to take a comfortable lifestyle, for those who planned well, up to a semi-luxurious one. Not that most of us really appreciate luxury a great deal.
You earned your social security by paying into over a lifetime of work, it wasn’t a gift – enjoy it and stop letting uncle sam take your money. I couldn’t tell by your article but how are you able to make the claim that you hold the record for the most money every contributed to social security?
It is kind of a quirk of the system. There is a maximum amount SS can collect from a person in a year, it is the same amount for everyone but only applies to people making at least $128,400 right now. So anyone who gets that much their first year of employment and keeps getting decent raises after that and works continuously for at least 35 years will have contributed the same (maximum) amount. They will share my “world record” and know that nobody can beat them either. It is just a consequence of the capped tax structure. What I didn’t say is there might be millions of world record holders, but I do think it is a small percentage of the population.
Interesting thoughts on SS. I don’t know what the answer is regarding ‘whether it’s fair’ to receive the benefit when you already have more than most, but I think we will need to answer this question some day soon. Obviously I agree that since you paid into it, you should receive the benefit, but I’m not sure if the program was originally intended for people with 7-digit IRAs to draw from in retirement. A lot has changed since the program was instituted, and I think it will eventually need to be amended to remain sustainable. It probably won’t affect you, though, just me and the rest of us that are nowhere near 60!
I think it was originally intended for people to die about the same time they began to collect SS but it clearly was not intended to be means tested. It was a pretty cheap program to run when people died young but our increasing lifespans have thrown it for a loop. My guess is they will make it all taxable as regular income and also keep raising the retirement age. I don’t think they’ll ever means test based on net worth, if they do they’ll have a lot of older voters coming for their heads. Look at the statistics of who votes: Greatest Gen 70%, Boomers 69%, Gen X 63%. Millennial 51%. It may well impact you younger sprouts more so it is prudent to plan retirement without leaning too much on the gov.
Nicely done!
I don’t anticipating having 35 years of maximum contributions, but I am about 3 years away from reaching the second bend point. After the that, the benefit of additional contributions is quite small. If I were to stop making a dime after contributing the max this year, my benefit would be about $30,000 (in today’s dollars) at age 70 and my wife could collect about 40% of that at full retirement age.
A few more years of income should get us closer to $50,000 combined, and that will, of course, be adjusted upwards with inflation over the years.
Cheers!
-PoF
And that is a lot of money, probably larger than most pensions! My main purpose of the post was to let people realize that depending on your work history SS could be a pretty big deal, it will be to you. You may not need it at all, as in my case we don’t need it, but that extra 50 or 71k of income is enough to fund some serious splurging or giving or health care costs. I didn’t stress the fact it is inflation adjusted but that’s a big deal as you pointed out. Most annuities and many pensions do not increase with inflation so while they look generous upon retirement they shrink over time in terms of buying power. By the way I’m guessing Jeff Bezos will get much less than I do from SS as will Bill Gates, the person that gets hit the hardest and gets the biggest check is the guy with the higher first year of pay, it is an odd system. Thanks PoF!
That’s $71K gross pay benefit. When we start cashing in our 401ks and IRAs we’ll be taxed more than 50% on the monthly social security check. Taxes and healthcare premiums will take out a big chunk of what we’ve nested away.
The First 50% of our Social Security benefit is taxed above certain income thresholds.
a. If your income is between $32,000 and $44,000, up to 50% of your social security benefits may be taxed. (joint filers)
b. If the combined income is more than $44,000,you may be taxed up to 85% of the income amount using the tax brackets.
There’s a sense of urgency to begin Roth IRA conversion ladders as soon as possible to reduce our future tax burden when RMD and social security begins.
Those are all good points and in my case I’m still earning a six figure income from my hobby job and might keep doing that. Yes I was talking gross but at least SS isn’t taxed any worse than ordinary income. I’m afraid it will be hard for me to escape paying a bit of tax especially if I keep working.
I do believe that must be a record. Nicely done, Steve! My wife and I will be closer to 55K. My income history is a roller coaster with maximums hit this decade. I won’t need this money, but my driving goal was always to change my family tree (and to not be stressed in old age). The less I have to tap savings, the more we can leave in trusts (for funding future generations college and/or seed money for business) — but if you don’t work hard in my family, you get nothin’. My wife and I also have a heart for animal rehab, so we want to set up a “permanent” donating trust fund for that, too.
Do you plan on staying in Arkansas until death, or have you considered moving to a warmer paradise like Hawaii? By the way, my son lives in NWA (he does Airbnb rentals catering to mountain bikers)…
NWA is cool. We haven’t really decided but since my hobby job is here we will likely stay somewhere in the state as long as I keep doing that. which could be all the way to 70 or could die out this year. It isn’t very predictable how long I can keep my current clients. There are not enough good tennis players down in South Arkansas for us to play as much as we want so we’ve been having to travel to play, and that’s not good. We might move to central Arkansas closer to Little Rock to find a club with lots of players.
one of the advantages of being a care-free mini retirement person in our 20’s and 30’s is that now that we got our act together for the past 15 years we’re not too far from being able to collect. mrs. smidlap is only 7 years away. we would get around 52k combined if we waited until 67 each, but i’m thinking of us at least taking hers at 62.
i did a rough calculation with mine and i could collect a total of 100k extra in benefits from 62 to 67 and it would take over 10 years to make up that amount if i waited. i think we can figure out how to make that extra 100k work for us or just spend/enjoy it in our 60’s instead of having more that we don’t need in our 70’s when i assume we’ll be spending less.
steve, if i had your money i’d burn mine.
Freddy, I’m the luckiest, least deserving guy I know. Maybe it is a reward for putting up with being such an enormous nerd in high school! I honestly think 62 is the right time for most to take SS. My wife is so healthy though I can see her drawing my benefit long after I’m gone so I’m doing the 70 thing because it will give her the most income later. Kind of the same reason she has term life on me still, she doesn’t need it but it makes her happy. Personally it makes me nervous to be worth more dead than alive when you look at the extreme hiking we do, just one little push and she’s way richer!
My husband will be retiring in 2 years, and will have worked 32 years at that point, at a very high income the entire time. I, like your wife, will be collecting the spousal amount, as it is higher than what I have coming. I am not sure what the amount will be, and I think at this point, he will take it at full retirement age, not any later, but I am thinking his annual amount will be about $40,000 plus $20,000 for me. In addition we too have enough saved and invested to be able to withdraw 6 figures at a 3% withdrawal rate.
On top of that, he gets a six figure pension. So we are in good shape. We still live frugally, and hope to leave most of our net worth to our children. But to your question, about living on social security alone- if it were all we had, we could make it work, as long as we had medicare, and lived in a low cost of living area.As you stated, these high Social Security amounts are not the average, and so yes, we are lucky. Most people, with average ss incomes are hard pressed to survive.
BTW, imagine if your spouse had the same working history as you! Your social security income would be over $94,000. I am sure there are some high income couples out there that will be collecting that amount.
You are exactly right, I can only claim to be a world record holder as myself, dual max income couples would slay us with their benefits! Wow, you two will have a six figure pension, six figure investment income and 60k SS payments, that’s some kind of awesome financial power. Have you ever run the Firecalc simulator? If you input all of that I’d predict it will show you two may have well over $20 million to hand down some day, perhaps even more. It isn’t really all that big a prize to die with the most money but your opportunity to leave several legacies behind is a very cool concept.
That is a very impressive social security benefit you have achieved and most undoubtedly deserve. Having a 35 year career where you have hit the cap for income contribution every year is indeed impressive.
I do plan on retiring early and since part of my career included working at a qualified state pension plan I am going to have a lot of zeroes being down my average for social security calculations from that as well as not working the full 35.
I sort of calculated roughly that if benefits stay the same (big if) I would likely get about 23k/yr. I don’t really count that in my true retirement calculations but would consider anything a bonus
It is really just kind of weird, my first year I earned to the penny exactly what the max rate was, $17,700. My salary was $18,000 but I didn’t start until part way through the month. Xray, you will have made much more than I did in my career, but my investments lived through some high times!
Way to go! The fact that you made that annual salary for 35+ years to max out contributions alone would leave most people on FIRE if they lived frugally anyway.
But you have to remember the wage base of $17,700 in 1978 is $69,000 in today’s money. But the greedy Gov taxes your first $128k now. They’ve doubled the tax in real dollars. Sneaky aren’t they? It is much much harder to pay the max now because they raise the bar way faster than inflation! And it is just going to get worse as the system runs low on money.
Steve – way to go and make sure you enjoy your hard work. Therefore, you need to take a trip to Montana to visit. But, wait until after Sep as I’m off to beautiful garden spot for six months known as Afghanistan – yeah baby!
As always, look forward to your next post.
Semper FI
Luis
I love Montana! You are doing this wrong Luis, Montana is beautiful in the summer and Afghanistan is hot as, well you know. Good luck and be safe over there brother.
Wow, I didn’t know social security can pay that much. $71,000 is an incredible amount to get just from social security alone. I live in New York City and the median household income in Manhattan is around $67,000. You can live in Manhattan just relying on your social security payments and have a better income than half the household in Manhattan. You won the lottery indeed.
Not only is it lot of money but it isn’t taxed like regular income either. Plus my wife only worked her career for nine years. If she had a career similar to mine she would draw what I’ll get and the total would be well over 80k.
$71k per year! That’s phenomenal!! That and the fact you mention you can still withdraw your savings… just wow – you are SET!
We are definitely set financially plus my very part time work makes about six figures. Not the blogging, I do that for free, but the one or two days a week consulting. I will likely phase that out over time, or not, I’m not sure.
My now retired husband worked for the govt for 35 years and receives a govt. civil service pension of $35,000 a year. You may be aware, under civil service, workers didn’t pay into SS. I also will have worked 35 years for the govt. when I retire in 5 years. I am under the newer Federal employee retirement system, since they did away with civil service. My SS at 62 will be $24,000. My husband can’t claim SS benefits as my spouse, because the govt says since he collects a civil service pension and didn’t “pay in” during his main working years, he can’t get anything. I’m happy for you and your situation. My husband and I will be fine. The whole civil service thing was misguided and I’m glad it has changed. I’ve seen it mess up a lot of people’s financial lives, especially in cases of a surviving spouse who didn’t work outside the home or a divorce.
I didn’t know all that about civil service, Francis. Thank goodness you and your husband planned well and will be fine! I have mixed feelings about Social Security and government pensions systems but they are both life savers for a great many people.
I’m not sure if I will join you as a world record holder or not, but I will be close. Right now I still have earning years from when I was in high school and college, so depending on how long I work those all may or may not drop off my highest 35 years (and even with those now I still have 7 years to go until I reach a total of 35 years and only want to work another 7-10 years).
While I am not counting on that money to be available for me once I reach that age, it sure would be nice and would allow us to leave even more for our family and/or ramp up our philanthropic efforts.
I think it will be a nice addition to both of us. Even if we end up giving it away that is a fun way to spend it. Or if it just adds to future inheritances that’s a generational blessing to hand down. I think that, like me you are not at much risk. People who are in their twenties and thirties have a much more uncertain future when it comes to the SS system.