Social Security? Don’t count on it.
Far too many Americans reach retirement age and rely on Social Security to survive. But you’re not like most Americans…you’re a HENRY™. While the rest of the world panics that Social Security Reserves have diminished, you can remain content, knowing that you’re stashing wealth for your future self, and when the day comes that you are ready to retire, you can use any Social Security benefits as fun money - icing on the cake if you will.
If you’ve been keeping up with the news as of June 2023, you’re aware that government-supported retirement is no longer a given. And it isn’t just the United States that’s facing a Social Security crisis. Two months ago, Paris looked like New York City if all the Waste Management employees had been spontaneously raptured.
French citizens put down their cigarettes and took to the streets after French President Emmanuel Macron proposed pension reforms that would raise the retirement age from 62 to 64. But why did he do that, and why might US lawmakers have to follow suit?
A quick refresher (on how social security works)
Most Social Security benefits go to retired workers and their dependents, but Social Security also pays disability and survivors’ benefits. Social Security is funded primarily by payroll taxes from employees and employers. When workers retire or become disabled, they may become eligible to receive monthly income from Social Security. In some cases, a worker’s children or spouse may also become eligible for benefits.
But because the benefits that retirees and other beneficiaries receive are largely funded by payroll tax contributions from people currently in the workforce, things go awry when beneficiaries begin to outnumber contributors. And when that happens, we’re faced with…
A social security crisis
If the ratio between taxpayers and retirees were equivalent, well, social security would be the most efficient system ever created by man. But it’s not, mainly because that ratio is always lopsided.
For the past three decades, there’s been more money “coming in” than “going out”, meaning the Social Security Administration (SSA) collected more in payroll taxes and other income than it paid in benefits and other expenses. This has resulted in a surplus, which the good people at the SSA have dubbed a “trust fund reserve.”
But people are now living longer than ever before, and in 2021, SSA was forced to begin redeeming its reserves to fund benefits. This leaves US lawmakers in a bit of a sticky situation. Because if things continue on this course, retirement benefits will enter insolvency around 2032.
The political debate over Social Security
America’s got a problem? Don’t worry, the politicians will fix it!
Sarcasm aside, this so-called crisis has caught the attention of our fearless leaders in Washington. Republican lawmakers are calling for a hike in the retirement age for both Social Security and Medicare. In true two-party fashion, Democrats are proposing an alternative solution: raise taxes. While the current payroll tax only applies to wages of up to $160,200, Elizabeth Warren and Bernie Sanders introduced legislation in March 2023, that would make the payroll tax also apply to wages over $250,000. Neither of these plans has been introduced as a bill yet.
Given the standard of US political gridlock, a fair question remains: what if they don’t reach an agreement?
No, Social Security is not “bankrupt”
Kathleen Romig of the Center on Budget and Policy Priorities writes, “Even in the unlikely event that policymakers fail to act, Social Security can pay full benefits for at least another decade, and at least three-quarters of promised benefits after that.”
You can find plenty of academic research on this topic, but we’ll give you the gist. Social Security itself can’t go bankrupt - that’s not how it works. Because it is a “pay as you go” program, you’re essentially funding your own future social security benefits each time you get paid (and subsequently taxed).
But if you’re a HENRY, you likely have another 30 years until you decide to hang up your metaphorical work boots and take your place on an equally metaphorical porch swing somewhere in the suburbs.
A lot can happen in that time. Elon Musk might buy the earth, evil ChatGPT might create an intercontinental dictatorship, and Social Security might cease to exist. The point is: no one should RELY on government retirement benefits, certainly not you. As a HENRY, you’ve got time on your side, meaning you can enjoy your life today AND save for the future. In fact, if you invested just $500 each month for the next 30 years, you will have accumulated $679,669 by 2053 (assuming an 8% annual return). Not bad, huh?
Is that enough to retire? Read this blog, “Is $1 million enough to retire?” to learn more.
HENRYs don’t NEED Social Security
Ready for a classic Stash Wealth hot take? Some millennials are OVER-SAVING for retirement. You heard that right. Other schools of thought, like the FIRE movement, believe you should set up to 70% of your income aside and retire early. We think that’s a load of bull.
Now we’re not saying you shouldn’t put any money away for retirement. No, no. You definitely should stash your wealth away for the future, but you’ll need to seriously think about what your goals are, and by which age you hope to retire before you start aimlessly putting money into a 401(k).
Because if your saving lacks intentionality and purpose, you could be over-saving for retirement. And that means you’re sacrificing good times in your golden years for a surplus when you’re 70.
So how do I know how much to save for retirement?
For now, we suggest you mess around with a retirement calculator like this one and take a guess at how much you might want for retirement. This can help you figure out how much you really need to stash away now to get on track for your long-term goals.
If you have no idea where to start when using a retirement calculator, focus on figuring out how much you’d need to save to be able to replace your current annual salary for a 30- or 35-year retirement. Fiddle around with the calculator until it shows what you’d need to save today to be on track for your current salary for 30+ years.
Ok, so I can’t count on Social Security. What can I count on?
Automation. We really can’t recommend this enough. “Set it and forget it,” is a popular money mantra and it’s certainly our motto when it comes to saving. If you make plans to save what’s left over at the end of every month, but somehow don’t ever have anything “left over,” automation is your new best friend.
Once you determine how much you’d like to save each month or payment period, automate a deposit into your savings and retirement accounts. Some 401(k) plans even allow you to set your contributions to automatically increase each year. Double automation, nice! As long as those annual increases don’t set you up to over-save. To learn more about what accounts you can use to invest for retirement, check out this blog: The Roth IRA in a nutshell.
The Rule of Ratios
If you don’t have any debt (credit card or student loan), follow the 50/30/20 Rule.
50% goes toward fixed expenses (rent, utilities, etc), 30% goes toward flexible expenses (restaurants, happy hour, impulse trips to the beach), and 20% should be saved — Split it about half-and-half between short-term goals/needs and long-term savings (aka retirement).
If you have debt, follow the 70/20/10 Rule.
70% goes towards fixed AND flexible expenses, 20% goes toward paying down your debt, and 10% goes toward short and long-term goals. Once your debt is paid off, you graduate to the previously mentioned 50/30/20 rule.
Note: If you want to take a couple of years off in your late 30s, maybe you need to save a bit more (and a bit sooner). These rules are more for thinking about retiring later in life. The earlier you start planning for retirement, the fewer compromises you’ll need to make in your lifestyle to achieve your savings goals. You’ll certainly hit millionaire status if you take a disciplined approach, hell, even semi-disciplined.
Automation makes it all so easy, it’ll feel like you’re cheating.
The riches of retirement
Here’s something you might find surprising: billionaires can collect social security. John Csiszar writes, “Although to some degree it might seem as if billionaires and millionaires in the U.S. shouldn’t be collecting Social Security, the truth is there is no law against it, and mathematically it makes sense. Social Security isn’t simply a welfare program, with money handed out to anyone who asks.”
Yes, the 1% can still qualify for Social Security.
What’s the point of this fun fact? A well-thought-out financial plan today means you can…
Have your cake and eat it today. Sprinkles come later.
While many of your peers might feel a sense of panic at the thought of Social Security going bankrupt (which as a reminder, it isn’t), you’re not like your peers. As a certified HENRY who has their [financial] sh*t together, Social Security benefits don’t mean much to you.
Putting a plan in place TODAY means you won’t have to think twice about retirement 30 years down the line, and you certainly won’t have to rely on Social Security to live comfortably in your 70s.
If they still exist by then, those monthly benefits will be merely a drop in the bucket of your wealth. Extra sprinkles added to the top of your very large cupcake. The extra several thousand dollars that the government sends you? You can use it to buy a new croquet set (if that’s still a thing in 40 years), give it to your grandkids (GRANDKIDS?!) when their parents aren’t looking, or splurge on whatever elderly people like to do in the 2060s.
You’re in charge of your own security, so arm yourself today with the right weapons. If you want the equivalent of a Brinks truck, a secret service, or an elite team of highly trained financial seals to help you on your journey, let’s talk.
Stash Wealth provides financial plans designed to assist high earning young professionals build and manage their wealth.
Stash Wealth offers a pragmatic approach to financial planning and wealth management. Whether saving up for Tahiti or a Tesla, we help you achieve your short-term and long-term goals.
Written by Stash Wealth Staff Writer
Stash Wealth Staff Writers are knowledgeable about personal finance topics. Their objective is to unravel the complexities of finance trade jargon, products, and services in order to equip HENRYs with a sound understanding of financial matters.