Social Security and Retirement Planning
Social Security was originally instituted by President Franklin Roosevelt in the 1930’s and 40’s as a security blanket for the “common man” as well as an extra safety net for the investor! Least we forget many a fortune was lost in the Great Depression of 1929! The American middle class was dealt a severe blow and the only people to survive were the entrepreneurs who owned viable companies that were still in business and making money. Many rich people quickly dropped from being rich into the ranks of only being well off! The common man sold apples on street corners for a penny!
It has been well known, but not readily publicized, that the Social Security system was heading for troubles. The first President to make changes, in a very low keyed manner, was Ronald Reagan who made arrangements to “up” the full benefit retirement age from 65 to 67 and eventually to 72. This legislation started to take effect at the turn of this century and affects everyone currently under the age of 50.
President Bush (and, separately, lobby organizations such as the Libertarian movement's Cato Institute) avocates fixing the Social Security system by “privatizing” -- which basically puts us back to the year 1928. Privatizing is great, so long as the economy and business is doing fine, but remember the Great Depression and before you say hog wash remember Enron!
Enron happened only about a decade ago. A very big company with marginal profits, lots of debts, lots of employees, in a business that controlled part of the power grid for the entire country. We’re talking gas, oil and electricity, vital necessities of life. A commodity that everyone needs. Who would ever imagine that Enron would go so far belly up that everything would be lost? Not a single employee who lost all of their 401k retirement plans, after some had put in close to 15 or 20 years at the company, thought Enron would ever fold.
Now, imagine if we do away with or reduce the safety net of Social Security so much that should this same thing happen to a company you work for or should a massive stock market fiasco hit between now and your age of 65 that turns your wonderful middle class lives into poverty or near poverty. What do you do when it will cost between $1,500 and $2,000 a month just to break even and national minimum wage is only maybe $12 an hour? Ok, let’s be liberal $15 an hour, but in reality by the year 2040 it will more likely be $10 or $11 an hour. That’s about $480 a week after taxes, times 52 weeks, divided by 12. That’s about $2,000 a month. Poverty level. The level at which an 18 year old kid gets their first job while still living at home.
How many $200,000 a year jobs are open to a 61 year or man or woman? How long will that employer keep you on staff? Do they have a mandatory retirement age? Will they keep you until you die?
Until you die? Of course! You have no savings, stocks or bonds. Don't you remember, they got eaten up by some fiasco! There is no more Social Security or if there is, it only pays $1000 a month and they will lower the benefits if you keep working.
Currently, if you retire at 65 and keep working benefits get cut almost in half. Right now minimum Social Security is about $800 a month. Living expenses in the U.S. average about $800 - $900 at poverty levels. I’m talking rent (these days about $400 minimum), power ($80 to $300 depending on where you live and the weather), food (maybe a single person can survive on $100 a month), transportation (hey, the bus is still around $2 everywhere, although automobile insurance for the elderly is quite high, around $100 a month minimum and they often revoke your license after age 75 if you drive like an old person, so get used to the bus).
Once you hit age 72 you can work with no further penalties, but in the year 2040 this age limit will probably go up to 77, 80 or even 82.
Oh, and good luck getting medical coverage after 65 and no one yet knows if President Bush and Congress are also talking Medicare cuts! That issue hasn’t come up yet, but the now retiring “baby boomers” are likely to need medical care and there will be millions of these people sending bills to the Medicare system. Sooner or later President Bush is going to have to decided which is more important, keeping soldiers in Iraq, buying more B-1 bombers or paying Medicare bills. Which do you think Mr. Bush will choose? I mean he’s not a big fan of the “lets fix Social Security and keep it like it is” ideology, is he?
His ideology is lets dump on it and let the people get their own plans with a mutual fund that’s nice and safe until another Enron comes along.
Oh, does everyone remember the big Savings and Loan fiasco of the 1980’s? Does everyone remember a man named Keating? Lincoln Savings in California? Large apartment complexes owned by “limited partnerships” who held the 12th mortgage but had no equity in the property?
A friend of mine lost part of his retirement in that fiasco. He had invested in those “limited partnership” companies financed by the Savings and Loan. He lost about $50,000 in one year because the apartment building was 40% empty, because no one wanted to pay $1,200 a month for a one bedroom apartment which was the amount required to generate the payments on all the mortgages! Ten years previously that same apartment that was now $1,200 a month was going for only $450. As people moved out, rent control ended. Many in the building were still only paying $800 a month. New tenants had to come up with first and last at $1,200 a month! Is it a wonder they folded?
Until that point my friend was making 15% interest on that partnership. His first time around he invested $20,000 and made $3,000 in interest payments the first year. After a few years his $20,000 became almost $30,000! You never do that in a mutual fund or even an IRA or CD saving account! It takes dozens of years to accumulate that much interest even at the 7% rates they were paying on CDs back then.
Today CDs are getting about 3% interest. You put $2,500 into a “certificate of deposit” (insured bank CD) and they give you $75 to $95 a year in interest. $20,000 in a long term, high yield CD will get your between $800 and $1,000 a year at today’s low interest rates.
I, myself, have a small account with New York Life. It’s called an “endowment” or “whole life” policy. I’ve been putting in $24 a month since I was 18 and I’ll get maybe $18,000 out in one lump sum when I hit 65 and the policy terminates or I can take payments of maybe $100 or so a month until I die. That, plus $800 in Social Security gives me enough to survive and I can even save up for a year and buy a new computer!
In the event I die between now and then my family gets the full face value of $20,000+. This type of policy, still available from many reputable companies such as New York Life, Prudential and Mutual of Omaha are well worth anyone under 30 looking into. In fact parents might want to start one for their kids and keep paying on it as long as they can to help give them an extra safety net! For a child it probably only costs about $15 a month. For an adult it is more like $30 a month today for a small policy.
Individual Retirement Accounts (IRAs) are also good if you can afford them and won’t ever need the money. Just make sure the account is insured by the Federal Government and don’t go over the maximum insured limit (usually $100,000 per account). You can start one of these probably with $500 or more and can put in up to $2,500 a year tax free. That means you can deduct your investment from your income taxes and lower your liability.
Certainly “privatized” accounts are a good idea, but losing the mandatory, Federally supervised safety net of Social Security is not wise, least you end up being a “door greeter” at Wal Mart until the day you die working at minimum wage.
How many of you will have $200,000 saved up in some account by age 65? If it costs $20,000 a year to live that $200,000 will hold you to age 75 unless you keep part of it in a saving account with high yield, and then you will delay it by drawing out $10,000 the first year in interest and $10,000 from the savings dropping the total to $190,000 in year 66. This method may hold you to about age 85 or even 90.
Without Social Security to help take the bit out of living in the golden years, you had best start planning now on how to save $200,000 above and beyond all those expenses for vacations, a home of your own, a new car and all those credit card bills, cost of college tuition for all your children, are already costing you each month!
To come up with that $200,000 minimum required to live on by the year 2040 means you have to pack away $200 a month, each month, without taking anything out of that account, over the next 35 to 40 years. How many of you have $200 a month to spare? By the way, under the current Social Security plan a person making $20,000 a year is paying about $125 month today, with their employer paying another $125 a month, for a total savings account of $250 a month, which is more than I tell you to save, so my figures are real low ball. In reality, you may need to pack away $400 a month to survive in the golden years! Just to survive! Now, who has an extra $400 a month to pack away?
Remember in the year 2040 there may be no Social Security benefits for anyone or if there is it may be no more than what I would make today, about $800 a month minimum. Can anyone survive on that amount in 35 years?
Planning for the future begins now and really should including making your voice heard in Washington, least government desert you in your old age, as well as looking into some personal private fund to help augement whatever benefits remain in the future...
The National Debt =========> -$ Loading...
The Social Security Fund ===> +$ Loading...
The above clocks, from zFacts.com, shows the amount of money in the Social Security fund and the amount of National Debt as they change from second to second. How accurate these are, is hard to say!