The Third Rail

The Social Security Administration recently announced they’ll dip into their reserves to make ends meet because costs are exceeding income. The last time this happened was in 1982.  According to a Wall Street Journal article this is three years sooner than expected.[1] The article also mentions the trust fund will be depleted in 2034 and Medicare’s hospital insurance fund will run dry in 2026.[2] The reasons highlighted for this shortfall are the aging population and a lack of revenue from the labor force.[3] The trustees are forecasting a reduction in benefits by 25% if the trust fund assets are depleted.[4]

Social Security and Medicare are entitlements long considered untouchable as politicians don’t want to carve into these programs, but something needs to be done. In my opinion, the trustees could incorporate a few strategies to preserve the assets, none of them good. They could apply means testing to your benefit so if you’ve been blessed with the ability to earn income and save money, then the government could reduce your benefit and give the surplus to your neighbors who’ve spent lavishly for years. The current age range for receiving benefits falls between the ages of 62 and 70. This range can be increased to the ages of 65 to 75, for example. Last, the government will need to raise taxes to pay for future benefits.

As I mentioned, these options aren’t good so what can you do today to protect yourself from a reduction in benefits?

  1. Plan. A financial plan will quantify your hopes, dreams and fears and give you an estimate of your future spending and retirement assets with or without Social Security. I’ve completed several plans for millennials and a few of them have requested to run their retirement projections without Social Security because they don’t have faith in our government to provide this benefit.
  2. Save more money. The more money you save today means more money in your pocket tomorrow. If you have access to a company retirement plan, maximize your contributions. You can contribute $18,500 if you’re under age 50, $24,500 if you’re older. You can also contribute to an IRA, regardless of your income. The maximum contribution is $5,500 for individuals under the age of 50, $6,500 if you’re older. In addition, depositing money into a brokerage account is recommended. If you can save an additional $500 per month, it may be worth more than $600,000 at the end of 30 years.[5]
  3. Invest in stocks. The long-term trend of the stock market will allow you to increase your wealth and potentially offset the short fall from Social Security. According to Dimensional Fund Advisors, $1 invested in the S&P 500 grew to $7,347 from 1926 to 2017. By comparison, $1 invested in long-term government bonds grew to $143.[6]
  4. Invest in small stocks. Small-cap stocks have outperformed large company stocks by a wide margin. $1 invested in small stocks in 1928 is now worth $30,560.[7]
  5. Reduce your expenses. Are there items in your budget you can reduce or eliminate? Can you reduce your spending and increase your savings? The lower your expenses, the less assets you’ll need at retirement. Let’s say your annual expenses are $100,000. At $100,000, you’ll need assets of $2.5 million to cover your cost of living. If you can reduce your expenses to $75,000, then the asset level drops to $1.875 million, a difference of $625,000.

Social Security has been a third rail for decades and this time is no different. Our government has kicked this can down the road for generations, so our children will inherit this problem.

Take control of your financial future so you can enjoy your retirement. It’s imperative that you start saving and planning today, so you don’t let the government dictate your retirement lifestyle – you’re entitled to it!

The most terrifying words in the English language are: I’m from the government and I’m here to help. ~ Ronald Reagan

June 6, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management firm located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. Photo Credit: Andrius Kaziliunas.

[1] https://www.wsj.com/articles/social-security-expected-to-dip-into-its-reserves-this-year-1528223245, by David Harrison, June 5, 2018

[2] Ibid

[3] Ibid

[4] https://www.wsj.com/articles/social-security-and-medicare-face-depletion-within-17-years-trustees-say-1499973205?mod=article_inline, by Josh Zumbrun, July 13, 2017

[5] FV calculation: $500 per month for 30 years at 7%.

[6] Dimensional Fund Advisors Matrix Book 2018

[7] Ibid