When I was driving home from San Mateo one day I took a wrong turn and ended up at Hillsdale Mall. There I saw an amazing relic, a Barnes & Noble bookstore! Before 2011, I used to spend an hour every week reading personal finance books at my local San Francisco B&N. It was a lot of fun, but like the trees in Dr Seuss’s story, The Lorax, the stores began disappearing.
There’s nobody I know under the age of 40 who believes Social Security will be paid in full when it’s time to collect. Maybe half of what’s owed, but certainly not 100%. As a result, many have smartly decided to write-off Social Security from their retirement plans in order to focus on accumulating enough assets on their own. Depending on an inefficient government during our golden years is dangerous. Instead, we must max out our 401ks and IRAs, while investing even more into after-tax investments.
Out of all the books on the Personal Finance bookshelf, I decided to pick one up on Social Security because it’s been off my financial radar screen for years. Here are some important bullet points we should all know about a program that will make us all millionaires if we work long enough!
THINGS TO KNOW ABOUT SOCIAL SECURITY
* Social Security’s taxable FICA limit has increased over time due to an inflation index. For example, the maximum was $22,900 in wage income in 1979. Today, it’s $118,500. It’s best to earn at least the maximum taxable wage income plus an amount up to roughly $250,000 in Adjustable Gross Income (after deductions) per person. You’ll see an immediate 6.2% – 12.4% salary increase on every dollar over $118,500 you make given the lack of FICA tax. But since we have a progressive tax rate with deduction phaseouts, making much more than $250,000 AGI doesn’t do you much good. You’ll probably just be overly stressed and unhappy!
* A 60-year-old couple who earned at or above the payroll tax ceiling their entire lives would get $31,972 each or $63,944 a year collectively if they began taking benefits at 66, which is their Full Retirement Age (FRA). $31,972 is not bad at all based on today’s risk-free rate of 2%. In fact, $31,972 = $1,598,600 in assets at a 2% rate of return! Let’s say the government lies to us and only pays 70% of what was promised, our Social Security is still valued at around $1,100,000. Take a look at https://www.ssa.gov/oact/quickcalc/ to calculate your estimated benefits in future dollars for yourself. We know that income generating assets are very valuable in low interest rate environments.
* Some of you have wondered how you’ll ever be able to create enough meaningful passive income during your lifetimes. Problem solved! Social Security can be looked upon as the ultimate passive income generating machine because it’s automatic until you die. The real debate is whether you try and start collecting as early as possible (62), or wait until 70 to get a bigger monthly check. Conventional wisdom is to wait for as long as possible before collecting since we’re all living longer. But if you think you’re going to die before ~80, then go ahead and collect that money!
* In order to qualify for Social Security, you need to have worked for 40 quarters, totaling 10 years. You don’t have to work 40 consecutive quarters either. You can work for three years out of college, take a two year vacation by getting your MBA, and then work another eight years to show the world you didn’t waste all that time and money. Once you’re at the 40 quarter mark, THEN retire early and write a personal finance blog! Anybody who retires early before working 40 quarters is not being responsible with their finances.
* Social Security benefits can be passed on to your current spouse, your ex-spouse(s), your young children, your disabled children, and even your parents if you die a gruesome and sudden death before 62! And, if you decide not to get legally married so the government can tax you more during your lifetimes, then you are SCREWED! This is because despite you paying all that FICA tax while alive, when you die, your Social Security benefits are returned to the government rather than to your unwed spouse.
* If you would like to ensure your Social Security benefits don’t go to waste, a good strategy is to delay marriage for as long as possible to avoid paying the marriage penalty tax, then get legally married at the age of 61, a year before you can start withdrawing from Social Security. Once you’re married, the goal is to then live for as long as possible in order to collect as much Social Security benefit for as long as possible. Shoot for age 100, it’s a nice even number. If your spouse dies before you do, his or her benefits will go to you and not to the government.
* The Full Retirement Age (FRA) is 67 for those born in 1960 or later, 66 if you are born between 1943-1954, and 65 if you were born in 1937 or prior. What happened to the years 1955-1959? Well, it’s basically all 66 years old and 2-10 months for FRA. Yes, the government does not want to simplify things by saying those born between 1943-1959 because they can create confusion among collectors. And the more confusion you can create, the less empowered citizens are. The less empowered citizens are, the less likely they will be on the ball to collect what is owed. They will also probably pay tons of tax penalties given it’s so confusing to decipher a 70,000 page tax document.
* Social Security benefits are inflation-proof! On January 1 of each year, Social Security adjusts all the benefits its paying by a consumer price index. The current maximum Social Security payouts might be around $30,000 a year currently, but in 20 years, they will be much higher! See for yourself by selecting the “inflated (future) dollars” option. I inputted a modest $50,000 a year income until 67 and got over $3,100 a month in future dollar payments. For those of you who are lucky enough to win the pension lottery, hopefully your pensions are also adjusted upwards as well. To supercharge your Social Security, all you’ve got to do is move to a lower cost state in retirement where the cost of living is lower.
RETIREMENT PARADISE AWAITS!
We all know the government is going to figure out a way to beat us in the end. So, despite all these positive data points about Social Security in this post, I still think we shouldn’t get too excited. Let’s continue to assign a big fat ZERO next to Social Security as part of our net worth calculations. Don’t even include a line-item actually.
But if the government finds a way to honor its commitments, then millions of medium-to-high income people who’ve worked their entire careers will be millionaires by their mid-60s. I prove this by capitalizing the expected value of our Social Security annual income stream by the risk free rate of return e.g. $31,792 in annual Social Security benefits X 70% due to government’s broken promises / 2% 10-year bond yield.
Add on our respective 401k balances after continuous max contribution, and it looks like everybody who works for at least a couple decades will be a millionaire by retirement time! Anybody confident enough to spend all their money now before finding out?
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