You see it on every pay stub. Without your permission, part of your paycheck is gone to FICA. According to The United States Social Security Administration, the deduction is 7.65 % of your earnings to fund Social security(6.2%) and Medicare(1.45%). You receive an occasional letter in the mail telling you what you’ll be able to receive every month for social security upon retirement.
What exactly does this contribution mean for you at retirement? For starts, the program isn’t guaranteed and these payments aren’t required to be made to you by law. The program itself will “begin to run a deficit in 2020 and will run out of funds in 2035.” (Social, 2020) Social Security is beginning its nose dive towards being bankrupt. You’re probably asking yourself what could be done to fix the program. Can’t we just raise the tax rate and fix everything? The real question is “do we want to fix a program with a track record of providing low standards of living while draining our future generation’s paychecks? Note: Social Security does serve other purposes aside from retirement. However, for purposes of our article, we’re going to cover it from a retirement state point.
Let’s take a look at the numbers. The average retiree receives $1503 per month at an annual rate of $18,036. The average American individual is projected to pay approximately $115,000 over their working lifetime into Social Security. (Williams, 2017) What would happen if we put this $115,000 into a 401k over the average person’s working life? If you look at average stock market rates* over their working life of 18-65, you’ll end up with $867,665.28 to retire on. (Compounds, 2020) You don’t have to wait for your monthly check, this would be your money to take in any amount. Additionally, you could live off this money at twice the average social security paycheck amount till you’re 89 years old. That’s right, you’d have $36,072 annual instead of only $18,036 until the age of 89. Which amount sounds like a more comfortable retirement and fun with grandkids?
Are you still convinced Social Security is a better retirement option than a 401k? Let’s factor in the 6.2% your employer pays into social security and put it into your 401k along with your contribution to social security. You’re now retiring with $1,735,306.52 and could live off $50,000 per year till you’re 99 years old! These potential earnings can be maximized by consulting a financial advisor to help you manage your retirement successfully. We provided all these calculations as if you sold all your investments for cash when you retired at 65 years old. If you chose to leave this money in the market while retired, your money can only continue to grow. Are you going to spoil grandkids, enjoy your retirement with your spouse or travel the word off $18,036? That’s a combined income average for a retired couple of $36,072. The 401k option provides you both a combined annual income of $100,000 till you’re both 99. Don’t think you’ll live till 99? You can live till you’re 85 at a combined income of $173,530. You’ll be able to afford everything to provide a comfortable retirement.
The future of Social Security being used for retirement is dim. It’s potential even when it was fully functional was quite limited. People have relied too long on Social Security as being their retirement fund. The program produced horrible returns, low standards of living upon retirement, and it’s horribly mismanaged. The answer to the Social Security pandemic is converting it into a 401k program through your employer. You should be in control of your retirement, not the government.
*7% annual stock market rate
“Compound Interest Calculator.” Compound Interest Calculator, 2020, www.moneychimp.com/calculator/compound_interest_calculator.htm.
“Social Security.” The United States Social Security Administration, 2020, www.ssa.gov/.
Williams, Sean. “The Average American Pays This Much in Social Security Payroll Tax.” The Motley Fool, The Motley Fool, 27 Mar. 2017, www.fool.com/retirement/2017/03/27/the-average-american-pays-this-much-in-social-secu.aspx.