Social Insecurity

Credit: David Castillo Dominici

Perhaps it was something I ate. Perhaps I tied my necktie just a little too tight this morning. Perhaps it’s the fact that I’ve gone without football for months now…

If you read my blog for some primarily “sunny” financial advice and occasional humor, I thank you. I must, however, warn you that today is going to be a little bit different. You see, I’m feeling a little like Alfred Hitchcock, Stephen King, and Edgar Allan Poe. I’m feeling like I need to share a piece of information that might not sit so well with you, but the sooner you hear “the horror,” the sooner you can come up with a different plan. Here goes:

You probably should not rely on your Social Security benefits to get you through retirement.

Why would I say such a thing? Well for starters, how much Social Security income are you expecting?

Go to the below Social Security Administration website and enter in your date of birth, current annual earnings or the amount from the last year you had earnings, and the month and year you expect to retire. Select “today’s dollars,” and take a deep breath.

Social Security Administration Website

Not very much, is it? I asked you to select “today’s dollars” because not many people see benefits continuing to increase long-term (as the "inflated (future) dollars" selection would have shown) with the current federal budget deficit.

Now that you know what to expect, could you live off that in retirement? No matter how much money you have made, the maximum 2012 Social Security benefit for a worker retiring at full retirement age (67 years old) is only $2,513/month. I know that’s about $30,000 annually, but is that enough for rising costs, your eventual declining health, and caring for your family? But wait, it gets scarier.

Even though you have paid into the system for years, Social Security income can be taxable! For 2012, if you file an individual tax return and your "combined income" is over $34,000 or if you file a joint tax return and your "combined income" is over $44,000, up to 85% of your Social Security benefits may be taxable. The only slightly good news is that your “combined income” is a sum consisting of your adjusted gross income, your nontaxable interest, and only ½ of your Social Security benefits.

The final scary point to consider is the future of Social Security. With people living longer, health care costs continuing to rise, and the Baby Boomers now receiving their Social Security benefits, the system as we know it is strained. Recent government estimates project that by as early as 2016, parts of the Social Security program could be unable to meet their obligations. The only way that could change would be by the government issuing more debt, increasing taxes, or more likely, cutting the amount of benefits. I’m not trying to predict what Social Security will be like in the future; I’m just warning you that the future monthly income number you saw for yourself could be overstated.

Retirees have probably already learned this lesson or are unfortunately learning this lesson the hard way, but if you are still working, you need to realize how little your probable Social Security income will be compared to your working income. Pensions are becoming more and more a thing of the past, so if you want to enjoy anything close to your current lifestyle in retirement, it’s up to you to build up your investments and save for retirement now.

Well I’m glad that’s off my chest! Please don’t worry too much though because I will soon be covering Individual Retirement Accounts, a potential tonic for your retirement income woes. Either way, next week I promise to be back to my old self and will post on something happier - how to save for a vacation!

-Tom