Dana asks a great question:
My husband and I are in our early forties. Our house is paid off in the last year and we have no other debts. However, we do not have much saved for retirement.
This was something that has been worrying us. But then we took a look at a Social Security calculator and it estimated that my husband and I will receive about $2,000 a month each in SS benefits. That’s more than what we spend in a month by a noticeable margin and we commute every day.
I’m trying to understand why we should be so worried about saving for retirement. SS is guaranteed by the government and if the government starts defaulting it won’t matter how we’re invested. If SS takes care of our needs why save more?
Great question, Dana!
Dana makes a great case as to why it might make sense to not save for retirement and instead rely on Social Security to pay for one’s retirement expenses. While I do think that some of the numbers that retirement calculators pump out are enormously high, I also think that almost every American is well served by saving something for retirement.
First of all, even though that estimate looks pretty good, it might not add up to as much as you think. While you will be eliminating some expenses, the truth is that many will stay in place and some others are going to grow. As you age, your average health care costs increase, for example, as does the cost of health insurance. Even if you’re as fit as a fiddle, that cost is going to go up and it’s going to fall to your shoulders after you retire.
Second, you might want to – or be forced to – retire early. It is very likely that the benefit estimate that Dana is working with in her example is an estimate of the monthly benefits she’ll receive if she starts receiving those benefits at age 67. What happens if she loses her job at 62 and can’t find a similar job at that age? What if it happens to her husband?
Furthermore, what if she actually wants to retire at 62 or at 60 or even earlier? In that case, she’ll have to fully fund living expenses out of pocket for the years until Social Security becomes available. If she chooses to start taking benefits early, then her benefits will be significantly reduced.
Third, a full Social Security plan doesn’t consider tax increases. If tax policy changes or tax rates go up, that means that you’re going to be paying a greater portion of your income in taxes. These changes could come in the form of increased income taxes, increased property taxes, increased sales taxes, and so on.
Like it or not, there’s a very good chance that our nation’s economic future involves higher taxes. Very few people want to give up the services we have now, the cost of those services is going to go up, and we’re already at a tax deficit nationally and in most states. Add all of that together and it’s a recipe for increased taxes.
Fourth, relying on a healthy Social Security income assumes that Social Security benefits won’t ever be cut – and that’s far from a guarantee. A big part of this plan is the assumption that there will never be any reduction in Social Security benefits going forward, which is very likely a mistake. The truth is that without some changes to the Social Security system, there will be funding problems in the future. What form will those changes take?
One likely change is a reduction in benefits – a 20% cut is often mentioned. Does Dana’s plan work if her benefits drop to $1,600 a month, especially given the other factors discussed here?
Another likely change is that benefits won’t start until an older age. You might not see benefits appearing until age 70 or age 72. This is due to the fact that people are simply living longer. The system is designed to pay out for five or so years, but as people get older and older, that length increases to ten or fifteen years, and that strains the system.
The point is this: you simply cannot predict the future. Believing that your entire retirement process is taken care of because of the availability of Social Security benefits at their current level means that you’re assuming that nothing will change to disrupt that plan over the next forty to fifty years. Well, fifty years ago, tax rates were far higher than they are now, for starters, and Social Security benefits paid out very differently.
So, how does that all affect you?
First of all, the big retirement numbers you often see – millions of dollars – is intended to include all of those contingencies. It includes protection against all of the things described above and more. It’s also insulated against bumps in the stock market (like the one we’re having today).
It’s also intended to include some retirement perks. It assumes that you’re going to keep your full current lifestyle and probably add a few perks like some additional travel.
The truth is that most people want a retirement somewhere in the middle. They’re not planning on an expensive retirement, but they also want some sort of protection against the events described above. It’s a balancing act.
That’s why the best retirement savings advice is based around moderation. It’s about not neglecting your current life, but not neglecting your future life, either.
Many people fall into the assumption that extracting even a few dollars a month from their paycheck is just far too painful to face. That just isn’t true. It’s a balancing act, and what you’re actually giving up right now when you save is your least important expenses. You’re giving up the completely forgettable and wasteful things in life, the things you barely remember. You give up the bag of chips from the convenience store or the celebrity gossip magazine, and it’s those dollars that you actually save for retirement.
What do you get with that savings? You take care of the hardest challenges I described above. You take some of the danger away from tax changes, from unexpected unemployment, and from other factors. Also, with every little bit of savings, you add a bit more flexibility to your retired life.
Without that additional savings, you’re not in a purely dangerous spot, but you do find yourself turning to having to work in your seventies to make ends meet if some of those changes occur.
What can you do, then?
It’s easy. Save what you can. Don’t save so much that it makes life miserable for you today. Just save enough so that the things you have to trim are forgettable. Save a few percent of your income. If your employer offers matching money in your 401(k), save enough to gobble up all of that matching money.
Where do you save it? A Roth IRA is a perfectly good place. So is your workplace 401(k). Don’t get stressed out about the details of it. It’s more important to save a dollar or two anywhere than to worry about the “perfect” place to put it.
If you find that it’s interfering with your life today in a noticeable way, cut back on your savings. The thing is, you’ll probably not even notice it. You’ll just subtly make different choices on some of the things that don’t matter. You’ll buy some store brand garbage bags. You’ll choose a slightly less expensive option for a gift. You’ll jump right in your car after gassing up instead of going inside for a goodie. You’ll buy LED light bulbs and swap out your normal ones as they burn out. Little, forgettable changes.
What do those forgettable changes get you? They get you an easier retirement, one with fewer risks and a bit more support and flexibility.
That’s a pretty good trade, and that’s why you should save a little, even with Social Security.