The maximum Social Security benefit you can receive as of 2019 is $2,861, or roughly 2.4% higher year over year due to a cost of living adjustment. The amount will continue to go up anywhere from 1% – 2.5% on average forever, depending on a cost of living adjustment index.
However, the average Social Security benefit is roughly $1,461 a month given the average household income is around $71,000 a year.
In order to earn the maximum Social Security benefit of $2,861, you must pay the maximum FICA tax limit each year for a 35 year period. Given the income limit to pay the maximum FICA tax is $132,900 in 2019, this is no easy feat for the majority of Americans.
What is interesting is that given the Bureau of Labor Statistics says the average 65+-year-old spends roughly $46,000 a year after-tax equivalent to $57,195 a year pre-tax using a 20% effective tax rate, this means the average retiree must come up with roughly $39,000 a year in gross income to afford their average spending.
Social Security Benefits Make Retirees Rich
Let me show you how rich the average 65+-year-old retiree is today.
We subtract $17,532, the average annual Social Security benefit, from $57,195 to get $39,663. In other words, $39,663 is the amount of gross income an average retiree must produce from his or her investments to match the BLS data. Or, $39,663 can be viewed as the annual withdrawal rate.
If we use an aggressive safe withdrawal or return rate of 5%, the average retiree with Social Security has about $793,260 in their retirement accounts ($39,663 / 5%).
If we use a historically safe withdrawal rate of 4%, the average retiree has $991,575 in investments ($39,663 / 4%).
If we use an even safer withdrawal rate of 3%, which is probably more appropriate in this low-interest rate environment, then the average retiree has $1,322,100 in investments ($39,663 / 3%).
The average retiree having $793,260 – $1,322,100 in their retirement accounts is a lot of money. We can basically assume the average current retire over the age of 65 is a millionaire given $793,260 + $1,322,100 / 2 = $1,057,680.
Remember, the average retiree not only has investment accounts, but a property that is either fully paid off or is close to being paid off among other assets.
Taking Into Account Pensions
In the past, pension benefits provided income to nearly one-third of older American retirees. Today, only about 23 percent of American workers have a pension, a percentage that is in continuous decline according to the Pension Rights Center.
In 2016, the median pension for adults over 65 who worked in the private sector was worth $9,262 a year. The median federal government pension, meanwhile, was $22,172, and for state and local government pensions, it was $17,576, according to the Pension Rights Center.
Given about 86% of the workforce work in the private sector, let's assume the approximate median pension amount is $12,000.
Now let's do the same calculations again to figure out what the average retirement account balance is for those who are able to collect both Social Security and a pension.
$57,195 (average gross retirement spending) – $17,532 (average SS benefit) – $12,000 (median pension) = $27,663. In other words, the average retiree who is able to collect both Social Security and a pension has to come up with $27,663 a year from his or her investments.
If we use an aggressive safe withdrawal or return rate of 5%, the average retiree with Social Security and a pension has about $553,260 in their retirement accounts.
If we use the historically safe withdrawal or return rate of 4%, the average retiree with Social Security and a pension has about $691,000 in their retirement accounts
If we use a 3% withdrawal or return rate, the average retiree with Social Security and a pension has about $922,000 in their retirement accounts.
Having $553,260 – $922,000 in investments after the age of 65 is still quite a healthy amount.
But remember, the average pension is going down in value. Therefore, those 23 percent of Americans who actually end up receiving a pension when they are older will likely see less than expected.
And further, 23 percent is a minority and does not reflect the median or average American.
But the next time you look down on government workers, don't. Their pensions are extremely valuable, especially as interest rates have come down since the 1980s.
My father, for example, earns roughly 70% of the average of his last three years pay for the rest of his life. So far he's received a 20X return on what he's put into his pension. Not bad.
Related: How To Calculate The Value Of Your Pension
Embrace Your Social Security Benefits
There's been so much noise over the past decade that the average American is screwed because he or she is not saving enough for retirement. But based on data from the government, it's clear the average retiree is doing splendidly well.
If the median retirement savings in American was really only $5,000 and the average retirement savings was really only $100,000, we'd have a humanitarian crisis!
The only logical reason to explain the difference between research figures and reality is that Americans have much more money than people think. Americans practice stealth wealth, especially from research institutions who ask us how much we have.
Americans also help each other out financially when in need. Financially, Americans are resourceful. If they require extra money, they'll go out and make more money. This is the land of action, not inaction, no matter how overweight the population gets.
Working Longer Is An Easy Solution
Nobody under the age of 40 should expect Social Security to be there for them in their 60s. It might be there for them in their 70s, but due to Social Security being underfunded by ~25% and getting worse each year, it's best not to expect anything.
But whenever the topic of Social Security comes up, it is a nice reminder there's a possibility I might get as much as $3,000+/month in “extra benefits” once I'm old enough to collect. If blessed, I'd like to use this bonus money to spoil my grandchildren at the amusement park.
The onus is on all of us to save for our own retirement through pre-tax and after-tax investments. After-tax investments really is the key to having options if you don't want to work until your 60s.
But the easiest way to ensure you'll have enough in retirement is to simply keep working. Yes, at the present time, you can collect Social Security benefits as early as age 62. But if you start collecting at 62, you will only get 75% of your full potential benefits. If you feel healthy, it's best to wait until age 70 to start collecting Social Security.
Working does do wonders for your retirement accounts because, for each additional year you work, you are not only boosting your retirement savings and Social Security benefits, you are also delaying one year of withdrawals.
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