Have a Healthy Retirement Without Social (In)Security!
Friday, October 2, 2009 | Ethan RobertsRating:
The Associated Press carried a story last week that the Social Security system is now being heavily strained by Baby Boomers in their early 60s, who have been laid off from their jobs within the past year. This new pressure on the system will force Social Security to pay out more in benefits than it collects in taxes over the next two years. This has not happened since the 1980s.
The high unemployment rate and "recession" is not only pushing more people to take Social Security at 62 rather than waiting a few more years to receive the larger check, but it's also generated about 500,000 more applications than usual for disability benefits this year.
Bernanke prays that his 'recession is over' call was not premature...
With the unemployment rate not expected to improve in the near future, and especially so for persons over age 60, there are two scenarios that are likely to occur.
- The first is that "Boomers" taking Social Security early is a trend that will likely continue over the next few years.
- The second is that our pals in Washington will be sure to raise our Social Security taxes again to make up for the increased pressure on the system.
Of course, the government has also been "borrowing" from the system for years.
Social Security Never Intended to be a Sole Solution
Its intent is simply to provide seniors with sufficient money to purchase the necessities of life. The rest needs to come from our savings and investments.
Work a job while receiving the benefits, and the Social Security Administration will deduct $1 for each $2 you earn above $14,160 (if you are younger than full retirement age), or $1 for each $3 you earn above $37,680 (if you reach full retirement age during 2009).
But if you don't go to work, it becomes difficult to live on what you receive in benefits. The chart below shows what you can expect to receive, according to your average annual earnings (over a 35-year time span):
Social Security monthly benefit chart...
For those Tycoon readers who are still younger than 50, I want you to set it into your mind that there will be NO Social Security for you by the time you reach age 62.
That's right, forget it.
I know it's unfair, as you've been paying into the system for your whole working life, but there's a good chance that they will either raise the minimum age for receiving benefits, or -- depending on your age -- the system may not even exist anymore, at least in its current modus operandi.
No Social Security for me at all?
So, What Can Be Done About It?
Now you can sit in your room and rant and rave, or even cry about how unfair it is, like our little friend above, OR you can go out and do something about it NOW.
You see, when I was younger, I always dreamed about retiring with a million dollars. I thought that would make me "rich." "Rich" guys sailed on their yachts, drove luxury cars, and played polo or had lunch at the country club every day.
WRONG!
Do you realize that, even if you have a million dollars at retirement age, in order to not run out of your principal, that amount is only likely to safely generate $40,000-$50,000 per year of income for life?
That's a 4%-5% annual return, and I know many of you will correctly say you can get a better return than that, but with how much RISK to blowing through all or a large chunk of your principal at some point before the end of your life?
Now, you may point out that one can live on $40,000-$50,000 during retirement years, especially since there are fewer costs (e.g., paid off-mortgage, children launched, no more commuting to work, etc).
However, remember that $40,000 in 2039 is not going to be worth the same as $40,000 in 2009!
There's this little thing called inflation that erodes the value of a fixed income over time. So that $40,000 will buy a whole lot less in 30 years than it does now!
In addition, $40,000 a year in Wyoming or Idaho goes a lot further than it does in San Francisco, Boston or New York City. So, where one chooses to live can have a huge effect upon their lifestyle when living on a fixed income.
So one needs to prepare for retirement a long time before reaching age 65. The chart below shows you how much you will need to invest each month, starting from zero at various ages to reach $1,000,000 or $2,00,000 by age 65.
| AGE | Amount You Need to Invest Per Month to Have $1 Million by 65 | Amount You Need to Invest Per Month to Have $2 Million by 65 |
| 25 | $ 160 | $ 320 |
| 30 | $ 265 | $ 550 |
| 35 | $ 440 | $ 880 |
| 40 | $ 750 | $ 1500 |
| 45 | $ 1310 | $ 2620 |
| 50 | $ 2400 | $ 4800 |
(approx. values, assumes 10% return per year)
You can clearly see from this chart that, the earlier one begins investing, the less money they need to contribute every month.
As we get older, it becomes more and more difficult to reach these goals by age 65.
Having a matching 401(k) helps you get there faster, as the money matched by your company will augment the annual returns on the money that you are contributing.
A Road Less Traveled, But Equally as Profitable
For myself, the main road to building wealth for retirement has been through real estate investing. But here's an interesting fact: Over a long time frame, real estate price appreciation is only about 4%-5% per year.
When people see that, they often thumb their nose at real estate investing as an inferior way to achieve wealth. Others look at the last two years and think that nobody can make money when real estate prices fall.
Yet, nothing could be further from the truth. What they fail to realize, is that the appreciation on the home is not the same as the appreciation on the money you have invested. That would only apply if all rental property was purchased with 100% cash.
Woman thumbs her nose at real estate
average appreciation rate
and misses an incredible
wealth-building opportunity...
Because when you have a mortgage, and you take that appreciation and factor it versus the down payment made, now the return on investment becomes far greater.
In addition, the principal that tenants pay off each month will typically add to that return.
How much principal will depend on the amount, term, number of months already paid, and interest rate of the loan. A look at the chart below will explain that better:
| AMOUNT OF LOAN | INT RATE | TERM | TOTAL OF YEAR #1 PRINCIPAL PAYMENTS | TOTAL OF YEAR #10 PRINCIPAL PAYMENTS |
| 100,000 | 6% | 30 | $ 1,228.00 | $2,234.23 |
| 100,000 | 6% | 15 | $ 4,241.72 | $ 7,717.36 |
| 100,000 | 7% | 15 | $ 3,909.82 | $ 7,857.41 |
On a $100,000 loan amount at 6% interest, fixed for 30 years, the first year's principal payment will be $1,228.
Let us assume the sales price for this house was $125,000 and the investor put down 20%, or $25,000.
At the end of year one, the value of the home was $131,250, as the home value appreciated by 5%. But the appreciation amount ($6,250) divided by the down payment of $25,000 is 25%!
And the $1,228 of principal payments made by a tenant adds another 4.9% to that. So, our total gross return for the first year is just under 30%!
The return on principal paid by tenants in year 10 is even better, as $2,234.23 divided into $25,000 is 8.9%! Add that into the appreciation for that year, and you begin to see why real estate investing is so lucrative.
If we buy the real estate at a good price, and use a 30-year mortgage, we may also have additional return from our rents as well. A cash flow of $200 per month ($2,400 per year) will add an additional 9.6% to our total gross return (before vacancies, repairs, etc.).
However, depending on their age, some investors may prefer to take a 15-year mortgage instead. Doing so will undoubtedly wipe out your rental cash flow, but will add to the return given off by the principal pay-down.
For example, the return on principal pay-down for the first year of the $100,000 loan above was $4,421.72. On a $25,000 down payment, that is a return of 17.6%!
So I believe that real estate is a fantastic way to build up one's wealth by retirement age. But I am not trying to compare it to stocks, bonds, options, gold, mutual funds or ETFs. I believe that one's investment portfolio should be well-diversified among many types of assets, with real estate being just one of those.
So, no matter what your age, don't let the news about Social (In) Security get you down. Stop your crying and get out there and invest all you can.
As David Bach writes in "The Automatic Millionaire," your should always pay yourself first, then pay your bills and necessities, and then spend whatever money is left over on fun or frivolous items.
Bach contends that most people never obtain wealth because they do just the opposite -- they pay themselves last after spending money on bills and the fun stuff. Then they have no money left to invest.
The bottom line: If you want to sleep well at night, begin to rely on yourself and do not look to Social Security to protect you in your golden years!
Retired investor sleeps well...
So what do you think, Tycoon readers? How much longer will Social Security remain solvent? Do you think the minimum age will be raised soon and, if so, to what age?
What are YOU doing instead of relying on just Social Security for your golden years? I truly would love to hear it!
See you next week!
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Ethan Roberts
Contributing Editor
The Tycoon Report
