A Troubling Trend in Investment Advice
Hi, everyone. I hope you have had a good week. Lately, I’ve read a few books that talk about investment and retirement. A lot of the advice I read was some pretty good advice, but I’ve noticed one trend that is disturbing as I read these books: a lot of these books tend to overestimate how much you need for a secure retirement by completely ignoring Social Security, or outright trying to scare people about the 76-year-old program that may be the most popular government program in history.
The Truth About Social Security
Social Security was passed in 1935 in response to the fact that two-thirds of Americans over the age of 65 lived in poverty. The first checks went out on January 1, 1937, as a transition program of a one-time check for the amount of withholding tax the retiree paid into the system. Five years later, Social Security took its now familiar pay-as-you-go system. However, there has always been a section of the population that think Social Security is a bad thing, either because they don’t think it is sustainable, or they don’t think it is something the government should be doing. Unfortunately, these people have lied about the system in order to make it seem to be worse than it is, and (based on different reasons) a lot of financial planners have gone along with this.
The truth is that Social Security has never missed a check. There have been concerns about its long-term viability, but minor changes to the payroll tax or the payout have made sure that the program pays out. At the point where the doomsday people say that Social Security “goes broke” or “goes bankrupt,” even if nothing is done, the absolute worst-case scenario is a 25% reduction in benefits. However, small changes to the system (such as raising or eliminating the cap on the payroll tax, as has happened many times before) will make sure that this doesn’t happen. So, when you get those letters three months before your birthday (mine comes in a few days), you can count on the number that they are giving you for your projected benefits.
Why Does This Fear Campaign Continue?
With the exception of Suze Orman, I’ve never seen a major book on investment that is not written from a point of view that is critical of the retirement-investment industry that tells people to factor in their Social Security in the amount of money they need for retirement. (She argues that the retirement age may go up, but the program will still be there. I am inclined to believe her because of the popularity of the program.) So, why do these financial planners (some, who are otherwise very good, are even willing to nickname the program “Social Insecurity”) continue to scare people on this issue and tell them not to count Social Security?
The book Retire on Less Than You Think by Fred Brock gives what I think is a good explanation for why this happens: a lot of retirement planners receive a commission, which makes it financially advantageous for them to convince you to keep the absolute largest amount they can talk you into putting in your account. Another assumption that is somewhat suspect is the “75% rule,” where one needs 75% of pre-retirement income to live. However, if you plan right, this is not the case. The most expensive thing for people in their working years is their mortgage, which most senior citizens already have paid off. Another major one is student loans which are, again, usually gone by this time. Finally, unless your Social Security check is at least $25,000 for the year as an individual or $32,000 (with the median monthly check of $1840, the majority are below this level), instead of paying into the system, you are now receiving from the system without paying taxes on that money. For this reason, it is better to instead look for a more individualized plan that is based on current cost of living rather than income, which for many people is actually closer to 60-70% of their income, and Social Security tends to pay out about 20-30% of pre-retirement income, which means that someone may only need closer to 40-50% of his/her pre-retirement income.
A More Rational Path Forward
Am I suggesting that someone tries to build a smaller nest egg? Absolutely not! Instead, I am asking you to think of a more balanced asset approach. An intriguing idea from Dave Ramsey (who does make the Social Security mistake, but has a lot of good ideas) is to, rather than simply focusing on retirement as the end-all, be-all of asset management, to use money that used to go to things like the mortgage and debt to truly build a fortune on top of retirement in order to be truly financially independent. Also, adding Social Security to the mix will mean that there is a much lower yield needed in those later years, which will provide peace of mind for those who always think they are not saving enough.
Then again, you may decide that you want to save and invest enough so your Social Security check doesn’t matter, and that’s fine, too. As Suze Orman reminds us, we need to stand in our truth. If we can do this, we will have a fuller picture of our investment goals, which will give us true financial peace of mind and help us plan in a way that helps us provide for our future and our legacy.
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Tags: Dave Ramsey, Fred Brock, planning, retirement planning, security, Social Security, sound advice, Suze Orman
This entry was posted on Thursday, July 14th, 2011 at 3:56 am and is filed under Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
July 14th, 2011 at 8:47 pm
Steve,
I agree, so much hype on social security not being around now, in the next 3 years. With all the issues our Government has with National debt. Devaluing the American dollar. This is having many jump in panic.
I understand taxes and taxation. Over ten years with the IRS in the larger tax area’s. Teaching on taxable income for business and individuals.
I have a clear understanding of how things work. This will not have me agreeing, with any of the hype. I have a different vision than others.
If you understand one of the highest cost, is medicine for our elderly. This is huge business and cost them more than coverage. They have to get a part D provider, just to meet the medicine cost. One place I found by experience, charges nothing based on certain situations. There are lots of places that will help, with the cost one may not be able to afford. Yet, this is a huge problem for most.
The more information one gets on their situations. The better they will be when the time comes.
I must add. There is some taxation for social security benefits. It is included as income on the Federal forms. You must be very careful not to allow your readers to believe that it is not taxable. Please, consult with a tax provider on these issues. Some parts are taxable.
Steve, very well done post. I love visiting this site knowing quality articles will be waiting for me. I love information if it has use with my readers and team.
Thank you for always providing detailed good content. Your a great coach in our industry. One, many have had the honor of working with you. I look forward in my next visit.
William Earl Amis Jr III´s last [type] ..Ultimate Team Existance
July 15th, 2011 at 4:24 am
Steve,
For capitial appreciation such as stock investment, you have to know if the tax is deduct at source, and if there is, you need have to make the tax payment again.
the detailed post that you have made is of very important to me, i definitely go subscribe to your post!
Mike´s last [type] ..Review On Investing in UK land – Jardin Smith International
July 20th, 2011 at 1:04 am
Thank you for your reply, William! I didn’t mean to imply that no one ever pays taxes on their Social Security benefits at all. I was simply trying to point out that there is a much higher exemption for Social Security benefits ($25,000 for individuals and $32,000 for couples) and with the average monthly Social Security check of $1840, this works out to roughly $22,100 a year, so I was simply trying to say that the majority of retirees will not be taxes on their Social Security benefits. I have gone back to the original post to clarify this statement.
Thank you so much for providing valuable information about the things that we need to think of when we plan for our future.
July 20th, 2011 at 1:14 am
Thank you for your reply, Mike! As far as retirement goes, Traditional IRA’s and 401k’s are tax-deferred (and the payout is taxed upon retirement), and Roth IRA’s are taxed when invested and the payout is tax free. However, I think that the ultimate issue is realizing what is available and how much we actually need. If people are ignoring Social Security, they aren’t getting an accurate picture.
July 20th, 2011 at 1:52 am
We’re so often told that the pension fund will be gone by the time we retire. thanks for sharing the truth about it.
July 20th, 2011 at 5:48 am
Hi Steve,
Fear based news is huge and works so well. When it comes to such an important issue, I find this very worrying. There are somethings where absolute truth is necessary and it’s sad that people are played in that way.
I find all of the financially planning stuff confusing to be honest – I’ll just keep it all stuffed under my mattress!!! LOL!
Thanks for bringing up such an important topic.
Emma
Emma´s last [type] ..10 uses for video conferencing
July 21st, 2011 at 1:13 am
Thank you for your reply, Anne! I am definitely of the belief that someone can easily say, “You should want to save and invest enough for retirement so you don’t need Social Security” but that is a lot different than saying, “It won’t be there for you! Give more money to me and I’ll manage it for you.” If what you really need turns out to be 40% instead of 75%, that is a huge difference. It is also something that is a lot better for someone who is much farther along the road to know so that person won’t panic and try to live on an austerity lifestyle that can’t be sustained or throw his/her hands in the air and say, “There’s no way I’ll be able to save that much, so why should I bother?” I want to invest enough so I can be completely independent, but when I look at my retirement picture, I know that I’m waiting for my annual letter in the mail to let me know what my Social Security benefits are so I can figure out how much I will actually need.
July 21st, 2011 at 1:19 am
Thank you for your reply, Emma! The company where I have my IRA set up (T. Rowe Price) is very good about encouraging people to remember Social Security in their calculations. If you want someone who can give you the specifics about investing for retirement, The Money Class by Suze Orman is very good. I also like the books by David Bach. I’ve read three (Smart Couples Finish Rich, The Automatic Millionaire, and Debt Free for Life), and they have all had some great information. Another that I would recommend for general principles of saving and investing is The Richest Man in Babylon, which is one of the books in my giveaway.
I admit that I am not a financial genius, but it doesn’t take one to figure out why people who have a financial stake in the matter are going to be more likely to attack Social Security. If we save 10-15% of our income and invest it well (one can easily earn a 10-12% average annual yield), the magic number is something that anyone can attain.
July 23rd, 2011 at 10:35 pm
Hi Steve,
Thanks for the great tips for us as we plan for retirement one day! You are absolutely correct that we need to think beyond social security as our retirement. I like Suze Orman, and I love what she says about planning so your social security does not matter! Awesome advice!
Linda
Linda Thomas´s last [type] ..Starbucks Unique Relationship Culture
July 25th, 2011 at 5:56 pm
Thank you for your reply, Linda! I think that I’m saying something a little different, though. I think that if people want to plan so that Social Security is a nice cherry on top, that is fine. However, I think that we make a mistake when we don’t factor Social Security into figuring out what we truly need. (My mutual fund does mention estimates for Social Security income to help plan for retirement.) As Suze Orman notes, the program will still be there. The full retirement age may be higher, but the program isn’t going anywhere. It’s a good idea to plan, but I’m investing my retirement in a way that factors in Social Security, but that doesn’t mean that I won’t get to a point of using money to build wealth, either. I think that it should be a part of a balanced plan. Sacrifice is good, but I think that putting life off until 67 is not the best way to live.
July 29th, 2011 at 4:43 pm
Steve the Owl's Blog » Blog Archive » Time is on My Side says:[...] everyone. Recently, I wrote about the importance of understanding Social Security’s role in determining [...]