Your worst investment and what to do about it Part I
As part of your retirement plan, do you make investments? You may be financially savvy or have a professional guiding you, but along with most
people who are legally employed you also make contributions to an “investment” that underperforms any other.
Well, technically, it’s not an investment. An investment would require you to purchase or have purchased in your name assets that you expect to appreciate in value. The particular so called investment I’m talking about involves no assets, and assuming you reach the point when it should start giving you a return on your contributions, it’s most likely that the return will be at a loss. Yes, this is the worst investment, and most people have it. Before I tell you what this “investment” is, you need to know that you can’t do anything to make it better: It’s a matter of law.
Your worst investment
Social Security (in my opinion) is the worse investment you will ever make.
How bad is it
The only real reason to invest is to acquire more, but the Social Security program almost guarantees you will lose money. If you don’t at least receive the amount you pay into the plan, it means you have a negative return on your investment—a loss.
According to Forbes The average man who retired in 2010 paid $300,000 into Social Security but will only receive $277,000 in lifetime benefits. The average woman’s lifetime benefits will be $302,000. (Women on the average live longer than men, and while it may not be a loss, what a poor return that is on the funds invested.) Considering the average person (man or woman) would have paid into Social Security for 40 plus years (Yes, I mean 40 years—not 40 quarters, which is the minimum for collecting benefits), you’d think the return would be much better. But…that’s not the case. It’s highly unlikely you’ll receive all the money you paid into Social Security, not to mention any profit.
Please note that the figures I’ve presented from the Forbes article vary from those the Social Security Administration publishes What-is-the-average-monthly-benefit-for-a-retired-worker. (You decide which to believe.)
It gets worse
As people from recent generations enter the workforce they have to pay into the same system their grandparents—perhaps their great-grand parents—did, but the Social Security Administration is changing the age at which they can start receiving their maximum benefits. They will have to work longer to be eligible for those benefits. That means they will likely pay more into Social Security over a longer period of time and receive less money. This is because people tend to keep working (and contributing) long past the minimum requirement of 40 quarters, but the mortality rate probably won’t change much.
There are other negative aspects to this “investment.”
You can’t borrow against it
Most retirement plans allow you to borrow against the amount you have invested. Not Social Security. You can’t borrow against it. You will receive your benefit in monthly payments after you are eligible—if you are eligible—no matter how badly you need the money sooner.
You can’t cash it out
With 401k and other retirement accounts you have the right to cash out your account, taking part or all of your money. With Social Security you can’t cash out, not even for the amount you paid in to it. Your funds are not available to you until you reach your age of eligibility, and if you have not contributed often enough (a set minimum amount for at least forty quarters) the total amount you did “invest” is forfeit.
According to the Social Security What-is-the-average-monthly-benefit-for-a-retired-worker as of January 2017 the average monthly benefit as of was $1,360.00. That really isn’t very much money—especially after you’ve spent a lifetime contributing to the fund and now it’s all you have to live on. And, it’s subject to taxation.
It’s not hard to find out how much your benefit is worth. You can open an account at the Social Security that will track your contributions. It will also give you the current monthly value of your benefit. When they look at that figure many people are disappointed. They realize they will not receive much from Social Security.
Another concern is that Social Security will cease to be. I know, I know, those rumors have been around for a long time and it hasn’t happened yet, but the truth is that benefits currently being paid out are mostly from contributions that are being taken in now. As often as the US faces employment crises (unemployed people do not make contributions to Social Security), it’s not beyond possibility that the funds will run out.
Even if it is still viable, we know Social Security alone will not be enough to sustain us in retirement. It’s time to make a plan that doesn’t include relying on the government to correctly manage our financial resources. Consider that the contributions you make to Social Security will have a tenuous return at best.
Seriously, Social Security payouts are more like an allowance than a retirement plan. But…you have to pay into it, so just do it. Pay it. Be done with it, and figure a way to make some of your take home pay work towards providing a better retirement.
What to do about it
Most retirees have considerably more restricted funds for living than they did while they worked. From what I see, there are two significant financial situations that need to be dealt with before retirement. First, the cost of retirement needs to be reduced as much as possible. Second, we need to have income that not only sustains us now but provides support after we retire.
In this post I’m going to tackle an aspect of reducing the cost of living. I’ll address the topic of sufficient income in my next post.
Plan without social security
Just assume Social Security benefits will not be available. Whether that is true or not you need to address what will be the biggest pull on your funds in retirement. For the average person that will be a place to live.
Housing takes about 35% of a retiree’s income. Since a place to live will be your largest expected expense, I think housing is a logical place to start thinking about reducing the cost of living when putting together a retirement plan.
There are ways to reduce, perhaps almost eliminate, the cost of housing in retirement. It requires implementation while you are earning money, but the plan can be reasonably simple: Buy a house now or buy a house later.
Buy a house now
You could purchase a house now and pay it off before you retire. If you do, when you go into retirement you will have your largest expected expense if not eliminated at least greatly reduced. That’s the simplest plan, but most of us can’t just run out and buy a house. Also, a lot of us hope to retire elsewhere. So, here are a few workarounds. (You can probably come up with others.)
1: If your credit is a problem, fix it. You’ll probably need a mortgage loan to buy a house and both your eligibility and the interest rate you’re offered will be dependent on you credit score. You can improve your credit score; there’s plenty of how-to information on the internet. Credit is not hard to repair, but it does take time. The loan is probably imperative and a lower interest rate will save you a lot of money. And as far as the issue of time goes…well, if you have to wait to purchase a house until you are a bit farther along in your career, you still will have the opportunity to build equity. The payments you’ve made before you retire will have reduced the cost of buying a house upon retirement, and you could sell it and use the funds to purchase a different place—something more affordable or appropriate to your retirement lifestyle. (Many people would rather downsize and use their time for pursuits other than maintaining their property.)
2: Maybe your credit isn’t bad, but you can’t afford to make mortgage payments. To buy a house you may need to increase your income or decrease your expenses—maybe both. If you need to decrease your current cost of living, you could pay off any outstanding bills you have, move to a cheaper place, drive used cars, or take the bus…If you need to increase your income you could work on getting promoted, find a better job, take on a part-time job, a side gig, etc. The point is that you need to save money. As with a credit problem, reaching a point where you can afford to make mortgage payments will take time, but you will also have the same advantage at retirement—a reduction of your overall housing expense and/or the opportunity to capitalize of what you have achieved.
3: You don’t want to live “here” after you retire. If you are in the position to get a mortgage, look for a place where you would like to live. Buy a residence there and rent it out until you are ready to use it. (By the way, I know people who chose to do this even though they were planning to stay in the area where they had their careers. While they worked they purchased or rented a modest priced residence and took out a mortgage on a nicer house. They rented out that house and applied the rent payment towards the mortgage. That worked out nicely.)
Now, as much as I like the idea of purchasing a house “now” and having it paid for upon retirement, sometimes it’s just not practical.
Buy a house later
You may have a job that requires you to move frequently—serving in the military, working construction, or as bridge painter, etc. Because you move so often, you may feel that purchasing a home right now would be impractical—especially if your family always moves with you. It is true, houses don’t always sell quickly, and you don’t want to settle for a low price just to be able to get away unencumbered. Of course, you could use the solution of renting your home out and then rent one yourself at your new location, but some people are uncomfortable doing that. They are not prepared to purchase a house given their present lifestyle.
Keeping in mind that housing is the biggest draw on a retiree’s funds, the other solution is to save money until they are ready to retire and essentially pay cash for a place to live at that time. These folks need to anticipate that their money will not buy as much in the future and it would now. Their plan should be to save diligently and accept that their future living accommodations may be modest. They most certainly, should not have a “we’ll deal with it when the time comes” attitude.
Instead of relying on social security you should be making investments to secure your future and the future of your family.
Social Security is you worst investment. It is not a panacea for limited funds after retirement. Each person needs to be proactive in providing for themselves beforehand. Saving and investing are imperative, but so is reducing what it will cost to live during retirement. Housing is the one most
expensive draw on a retiree’s finances. Before we retire, we need to find ways to reduce that cost. A plan needs to be made and implemented while we are still career oriented. After we have developed a way to have an affordable place to live, we need to concentrate on investments that will yield funds to sustain us through retirement. That will be the topic of next week’s article.