Will Social Security Be Your Only Hope?

It is working Americans’ greatest fear: Being dependent on meager Social Security benefits in old age. A surprisingly large number of people will be in that position — a median dependence of 39% in the year 2022 and slightly higher (41%) in 2062, according to a government study.

What “dependence” means for the typical household is that 39 cents of each dollar of income they get will come from the government-run retirement plan.

As with all statistics, averages obscure important information. Among the lowest earners, dependence on government income is much higher (52%). Still, even the top fifth of Americans will find that 25% of their income — on average for their group — comes from Social Security.

The government does these studies not to alarm people (goodness knows they’re dry reading) but to try to figure out how much economic pain would be inflicted by changes in how Social Security is funded. In short, if a future Congress cuts benefits, who suffers?

Another, somewhat sunnier, way to look at the problem is in terms of “income replacement,” or how much you need to retire. Here, the Social Security Administration counts all possible preretirement savings income — investments, pensions and Social Security.

The government figures the median retiree 62 or older will have an 86% replacement rate in 2022 under current law. Put another way: A retiree on average will see a 14% decline in total income compared to his or her working years. All the more reason to be debt- and mortgage-free by retirement.

The SSA projects a replacement rate of 84% by 2062 but points out that current tax rates only support a payout of 72%. As you likely already know, we aren’t taking in enough money to meet the obligations promised.

So, if you’re average, early in your earning years and tax law stays the same, get ready for a pretty hefty lifestyle change at 62. You’re likely to lose 28% of your current income, all told.

Of course, you don’t have to guess. The Social Security Administration offers a web tool that estimates your benefits as they currently stand. Not a guess or an average, but your actual benefit statement. It’s the same as the one you get in the mail once a year, only online and available anytime.

If you run your numbers and come away a bit shocked, and you might, the very next thought to enter your mind is probably “What can I do about it?” Here are your marching orders for the next few years:

1. Ramp up your savings rate

Do you take advantage of the government’s catch-up allowance for those 50 and older? Do you put away the maximum in your IRAs and 401(k) accounts? Besides the immediate tax break, it’s extremely important to use the tools right in front of you, rather than hope the stock market or plain luck will rescue you down the road. The more likely outcome will be financial challenges, not windfalls in your favor. A diligent saver uses market movements to buy low and sell high by prudently rebalancing his or her retirement portfolio.

2. Pay down debts for good

This is huge. During the boom times, people traded up houses like they were changing clothes out of season and leased brand-new cars every 18 months. Credit card spending was seen as a tool of the privileged and smart. Nothing could be further from the truth. Borrowing is the mirror-image reverse of smart investing: Rather than making money on your money, you become the milk cow for the big banks and other lenders. It’s time to change those habits.

3. Invest for the long term

How long will you live? Will you need money all of those years? Nobody knows the answer to that first question, but the second is a no-brainer. Your income needs will never disappear and might even increase in old age. It’s critical to assume that your investing time-frame at retirement is decades long — because it might be — and that low cost and efficiency in your investment approach is paramount. Your worst-case scenario should be deciding which charity deserves your estate or how best to benefit your heirs, not how to pay the power bill in your 90s.